Question

Provide a 300-plus word description of each topic:

The main reason for international trade, what gains derive from it, the conditions of the U.S. balance of payments, aspects of terms of trade, the main trade barriers and efforts to eradicate them, the arguments for protectionism and a comparison of the latter to the pros/cons of free trade; use graphs, formulas and examples to support your findings. Also address international finance, the evolution of the exchange systems, what affects currency rates and how those in turn influence prices, output and trade flows. Conclude with your outlook on the u.S. trade balance.

Answer 1

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Internationation Trade- International trade means exchange of capital, goods and servicess across the border.

Reasons of international trade- Threre are many of reasons of international trade. The reasons behind the international trade are following as-

1) Maintaing Blance of Payment- Every country has to maintain its balance of payment position. Since every country has to import which results in outflow of foreign exchange, it also deals in export for the inflow of foreign exchange. So, higher the export than import is always benefical for the balance of payment of the country.

2) Facilitate Dconomic Development -  Imports facilitate economic development of a nation. This is because with the import of capital goods and technology, a country can generate growth in all sectors of the economy, i.e. agriculture, industry and service sector. So, in the growing phase , import os any counrty is always higher than the export and face the problem of trade imbalance.

3)Division of labor and specialization – Foreign trade leads to division of labor and specialization at the world level. Some countries have abundant natural resources thus they should export raw materials and import finished goods from countries which are advanced in skilled manpower. Thus foreign trade gives benefits to all the countries and thereby leading to division of labor and specialization. Normally a underdeveloped nation or developing nations have abundant natural resources thus they should export raw materials and import finished goods from countries which are advanced in skilled manpower.

4) Equality of prices – Prices can be stabilized by foreign trade. It helps to keep the demand and supply position stable, which in turn stabilizes the prices.

5) Availability of multiple choices – Foreign trade helps in providing a better choice to the consumers. It helps in making available new varieties to consumers all over the world, thus giving the consumers a wide variety of options to choose from.

Gains from international trade-

There are two sides of international trade-1) Import and 2) Export

1) Import- Import means buying of goods or services or capital from other countries. There are many benefits of import. These are following as-

a)  Importing goods brings new and exciting products to the local economy and makes it possible to build new products locally..

b) The benefits of import include giving developing nations a chance to boost their economy, producing higher quality products, and increasing revenue by introducing a new product to a locale.

c) Imports allow greater diversity in the market for shoppers and residents of specific countries, as they can obtain foreign products without traveling or paying additional fees.

d) Import benefits extend beyond individuals to businesses. Local businesses that engage in importing goods can create a valuable niche in their local market as the primary local supplier of a particular product.

2) Export- Export means selling goods, services to the other countries. The gains of export are following as-

a) Growth in exports can create employment.In recent years, exports have become more diversified with a greater reliance on service sector based exports, for example, computer programming.

b) Exports are a component of aggregate demand (AD). Rising exports will help increase AD and cause higher economic growth. Growth in exports can also have a knock on effect to related ‘service industries.

c) The strength of exports has a large role in determining the current account deficit.

d) Exports increase jobs, bring in higher wages, and raise the standard of living for residents. As such, people become happier and more likely to support their national leaders.

e) Exports also increase the foreign exchange reserves held in the nation's central bank.

The conditions of the U.S. balance of payments-

Balance of Pyment-

The balance of payments (BOP) is a statement of all transactions made between entities in one country and the rest of the world over a defined period of time, such as a quarter or a year.

The BOP is divided into three main categories: the current account, the capital account, and the financial account. Within these three categories are sub-divisions, each of which accounts for a different type of international monetary transaction.

The U.S. Balance of Payments accounts (formerly known as the U.S. International Transactions accounts) is a quarterly statistical summary that provides a comprehensive and detailed view of transactions between U.S. and foreign residents, organized into three major categories: the current account, the capital account, and the financial account. The current account records exports and imports of goods, services, income, and current transfers. The capital account records capital transfers, such as debt forgiveness. The financial account records transactions for official assets, for U.S. government assets other than official reserve assets, for direct investment, for portfolio investment, and for other investment.

The U.S. current-account deficit decreased to $130.4 billion (preliminary) in the first quarter of 2019 from $143.9 billion (revised) in the fourth quarter of 2018. June 2019 Trade Gap is $55.2 Billion. The U.S. monthly international trade deficit decreased in June 2019 according to the U.S.

Aspects of terms of trade, the main trade barriers and efforts to eradicate them-

Internation trade is a very complicated system and full of freedoms, liberty,abrries, support and conditions. Here i will discuss about the main trade barriers. The main trade barriers are following as-

Minly there are 3 main trade barriers:Tariffs, Non-Tariffs, and Quotas.

1) Tarriffs-Tariffs, or taxes imposed on imports like, the Trump administration initiated multiple tariff rounds on China and elsewhere.Tariffs are a type of protectionist trade barrier that can come in several forms.Tariffs are paid by domestic consumers and not the exporting country, but they have the effect of raising the relative prices of the imported products.

2) Non-Tariffs-

Non-tariff barriers can include excessive red tape, onerous regulations, unfair rules or decisions, or anything else that is stopping you from competing effectively. Non-tariff barriers can affect all forms of goods and services exports from food and manufactured products, through to digital services. Examples- administrative procedures, quantity restrictions (such as quotas), licensing requirements, data storage requirements, privacy requirements, board director requirements, procurement rules, price controls, subsidies, product labelling requirements, phytosanitary or technical regulations and standards.

3) quotas- A quota is a government-imposed trade restriction that limits the number or monetary value of goods that a country can import or export during a particular period. Countries use quotas in international trade to help regulate the volume of trade between them and other countries

We are living in a new capitilist free market economic world. The world is flat now and we are highly depend upon each other. So, the imposing of tarrifs or taxes are not more sucessful and harmful for the economy. There are numbers of internationation organization are working on it like, WTO. A numbers of bilateral treaty and internationation trade treaty has be designed for eliminating it like, EU, India- China trade treaty etc.

address international finance, the evolution of the exchange systems, what affects currency rates and how those in turn influence prices, output and trade flows.

International Finance- International finance is the study of monetary interactions that transpire between two or more countries. International finance focuses on areas such as foreign direct investment and currency exchange rates. Increased globalization has magnified the importance of international finance.

Benefits of intenational finance are-

a) Access to capital markets across the world enables a country to borrow during tough times and lend during good times.

b) It promotes domestic investment and growth through capital import.

c) Worldwide cash flows can exert a corrective force against bad government policies.

Evaluation of exchange system-

The exchange rate is the rate at which one currency trades against another on the foreign exchange market.

Elasticity of demand. If there is a depreciation in the exchange rate, exports are cheaper, but the amount quantity increases depend on the elasticity of demand. If demand is price inelastic, then a depreciation will have a limited impact in increasing demand and improving economic growth. If demand for exports is elastic, then there will be a big boost to exports.

Time Lag. In the short term, demand for exports is often inelastic but becomes more price elastic over time.

Reasons for depreciation/appreciation. Often it is most successful economies who see appreciation. The currency appreciates because there is more demand for their exports. Therefore, in this case, a depreciation won’t cause a fall in economic growth – only limit the growth rate. If the currency appreciates due to speculation, during a period of weak economic growth, then the negative effect on growth may be more pronounced.

The exchange rate affects the rate of inflation in a number of direct and indirect ways: Changes in the prices of imported goods and services, this has a direct effect on the consumer price index. A stronger dollar makes it more expensive for Britain to import these items and A weaker dollar makes it more cheap for Britain to import these items and it will increase AD and in long run higher AD means higher output(GDP)

The exchange rate has an effect on the trade surplus or deficit, which in turn affects the exchange rate, and so on. In general, however, a weaker domestic currency stimulates exports and makes imports more expensive. Conversely, a strong domestic currency hampers exports and makes imports cheaper.

The arguments for protectionism and a comparison of the latter to the pros/cons of free trade; use graphs, formulas and examples to support your findings.

Free trade means just what the name implies: free and unfettered trade between countries, unhindered by steep tariffs, and where goods can pass over borders unmolested by any restrictions. By contrast, protectionism also means what the name implies: It's the process where governments slap stiff taxes – tariffs – as well as a host of restrictive regulations on goods that other countries want to export.

Advantages to trade protectionism include the possibility of a better balance of trade and the protection of emerging domestic industries. Disadvantages include a lack of economic efficiency and lack of choice for consumers. Countries also have to worry about retaliation from other countries.

Avantage of free trade-

1. Increased efficiency- The good thing about a free trade area is that it encourages competition, which consequently increases a country’s efficiency, in order to be on par with its competitors. Products and services then become of better quality without being too expensive.

2. Specialization of countries- When there is tough competition, countries will tend to produce more products or goods that they are most efficient at. This is because they take less time to complete and their output is higher.

3. No monopoly- When there is free trade, and tariffs and quotas are eliminated, monopolies are also eliminated because more players can come in and join the market.

4. Lowered prices- When there is competition, especially on a global level, prices will surely go down, allowing consumers to enjoy a higher purchasing power.

5. Increased variety- With imports becoming easier and cheaper, consumers will gain access to a variety of products that are inexpensive.

Disadvantages of Free Trade-

Despite all the benefits brought about by a free trade area, there are also some corresponding disadvantages, including:

1. Threat to intellectual property- When imports come in more easily, domestic producers can easily access them, allowing them to copy the ideas and sell them as knock-offs. With many countries with little to no laws on intellectual property, it would be easy to steal ideas.

2. Unhealthy working conditions- Outsourcing jobs in developing countries can become a trend with a free trade area. Because many countries lack labor protection laws, workers may be forced to work in unhealthy and substandard work environments.

3. Less tax revenue- Since member countries are no longer subject to import taxes, they need to think of ways to compensate for the reduced tax revenue.

I have also attached a graph in which howe AD-AS impacted the output.  please find the attachment.

You can cordinate this AD-Curve with the exchange rate on its impact on AD and how AD will affect the Output.

Thank You