Question

What are the factors affecting International Trade Flows? Please identify three factors and explain

Answer 1

1. Inflation

Inflation affects the country's current account. If the inflation rate in the country rises as compared to other countries then their current account will decrease. Cureent account is the different between the country's exports and imports. Inflation will increases the prices of the home country, which will reduce their exports since they are more expensive for other countries, and imports will increase because foreign goods will be cheaper compared to the home country.

2. Government policies

Government policies can largely affect international trade flows. Policies regarding restrictions on imports, subsidies for exporters, lack of restriction on piray, environmental laws, labor laws - cost of labour is an important part of production costs, labour intensive industries are in need of cheaper labour affecting the import and export of labour.

3. Exchange Rate

Currencies of one country are valued in terms of other currencies, currencies which are most commonly used for trade ( Dollar, Euro , Pound , Yen) . If one country's currency rate appreciates, it becomes a stronger currency, enabling it to increase it imports since its cheaper and would increase exports if the exchange rate depreciates since that becomes cheaper for other countries. Fluctuations in exchange are an important factor affecting international trade flows.