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

1. Main reason for international trade:

International trade is taken place due to differences in technology between countries, differenences in endowment of resources. intra country dissimilarity in consumer or input demand and also due to differences in government policies.

Physical resources are limited in every country. International trade allows the consumers of a country to consume products that are not produced in home country. Even it may happen that a country may import a product from other country without producing it at home due to higher production cost. Therefore, it increases efficiency in production.

2. Gains derived from trade:

Participating countries in trade may gain in terms of production, consumption or in both. Increase in consumption is a gain from trade in terms of consumer welfare.

Reduction in production cost, increase in real income from specialisation of goods are production gains from trade. Producing goods which have lower costs and import those hving higher opportunity costs are gains from trade.

3. The conditions of the U.S. balance of payments:

The components of balance of payments are current acount, financial account and capital account. The conditions of US balance of payments are dependence of consumption and low price. Large deficit in balance of payments is thus resulted from high spending on impor and lower earning from export.

During 2019, US traded $5.2 trillion with other countries. Export at that time was $2.5 trillion and import was $2.9 trillion.

4. Aspects of terms of trade

Terms of trade is the ratio of export to import price. ToT implies the rate at which a country trades products and services with other countries. When the price of the product rises, terms of trade improves and when import price rises, ToT decreases.

ToT = Px/Pm, where Px is export price and Pm is import price.

When ToT improves, gain from trade improves and to increase in higher earning from export and reduces import volume. Hence, balance of payment deficit improves.