Question

Provide some real-world examples which illumistrate how international trade or balance of trade is affected by cost of labor, inflation, national income, exchange rate, credit condition, and government policies。

Answer 1

A country's balance of trade is defined by its net exports (exports minus imports) and is thus influenced by all the factors that affect international trade. These include factor endowments and productivity, trade policy, exchange rates, foreign currency reserves, inflation, and demand.

• A nation has a trade surplus if its exports are greater than its imports; if imports are greater than exports, the nation has a trade deficit.
• International trade is largely affected by the demand for a nation's goods and services.

Balance of Trade is affected by Cost of Labour :

A country with an abundance of unskilled labor produces goods requiring relatively low-cost labor, while a country with abundant natural resources is likely to export them. The NIEs, such as Hong Kong, Singapore, South Korea, and Taiwan have achieved strong trade positions through policies of growth led by exports––not of traditional raw materials but of manufactured goods, beginning with labor-intensive manufactures such as textiles and electronics.

Balance of Trade is affected by Exchange rates :

The exchange rate has an effect on the trade surplus or deficit. A weaker domestic currency stimulates exports and makes imports more expensive. Conversely, a strong domestic currency hampers exports and makes imports cheaper.

For example, consider an electronic component priced at $10 in the U.S. that will be exported to India. Assume the exchange rate is 50 rupees to the U.S. dollar. Neglecting shipping and other transaction costs such as importing duties for now, the $10 electronic component would cost the Indian importer 500 rupees.

If the dollar were to strengthen against the Indian rupee to a level of 55 rupees (to one U.S. dollar), and assuming that the U.S. exporter does not increase the price of the component, its price would increase to 550 rupees ($10 x 55) for the Indian importer. This may force the Indian importer to look for cheaper components from other locations. The 10% appreciation in the dollar versus the rupee has thus diminished the U.S. exporter’s competitiveness in the Indian market.

• Foreign currency reserves: To compete effectively in extremely competitive international markets, a nation must have access to imported machinery that enhances productivity, which may be difficult if forex reserves are inadequate.
• Inflation: If inflation is running rampant in a country, the price to produce a unit of a product may be higher than the price in a lower-inflation country. This would affect exports, thus affecting the trade balance.
• National income: When income increases, the demand for imports increases, and that, in turn, works to decrease the trade balance.

Balance of Trade is affected by Savings rate :

Economies that have savings surpluses, such as Japan and Germany, typically run trade surpluses. China, a high-growth economy, has tended to run trade surpluses. A higher savings rate generally corresponds to a trade surplus. Correspondingly, the U.S. with its lower savings rate has tended to run high trade deficits, especially with Asian nations.

Balance of Trade is affected by Government Policies :

China pursues a mercantilist economic policy. Russia pursues a policy based on protectionism, according to which international trade is not a "win-win" game but a zero-sum game: surplus countries get richer at the expense of deficit countries.

For the last two decades, the Armenian trade balance has been negative, reaching an all-time high of –33.98 USD million in August 2003. The reason for the trade deficit is that Armenia's foreign trade is limited by its landlocked location and border disputes with Turkey and Azerbaijan, to the west and east respectively. The situation results in the country's typically reporting large trade deficits.

Trade Policies : Policies that restrict imports or subsidize exports change the relative prices of those goods, making it more or less attractive to import or export. For example, agricultural subsidies might reduce the cost of agricultural activities, encouraging more production for export. Import quotas raise the relative prices of imported goods, which reduces demand.