Understanding International Trade and the Global Economy

What is International Trade?

International trade involves the exchange of goods and services across national borders. It allows countries to specialise in producing certain products efficiently and exchange them for items they cannot produce as cost-effectively themselves. This concept of comparative advantage forms the basis of international trade.

Importance of International Trade

• Access to a wider range of goods and services
• Increased competition and efficiency
• Economies of scale for industries
• Greater consumer choice and lower prices
• Promotion of economic growth and development

The Global Economy

The global economy refers to the increasing integration and interdependence of national economies around the world. This is facilitated by factors such as:

• Reduction of trade barriers (e.g. tariffs, quotas)
• Advancements in transportation and communication
• Growth of multinational corporations
• International agreements and organisations (e.g. WTO, EU)

Balance of Payments

The balance of payments records all economic transactions between a country and the rest of the world over a specific period. It comprises:

• Current account (exports, imports, income flows)
• Capital account (investment flows)
• Financial account (assets, liabilities)

A positive balance indicates a surplus, while a negative balance indicates a deficit.

Exchange Rates

Exchange rates determine the relative prices of different currencies for the purpose of conversion. They play a crucial role in international trade by influencing the demand for exports and imports. Factors affecting exchange rates include:

• Inflation rates
• Interest rates
• Government policies
• Trade and capital flows

Globalisation

Globalisation refers to the increasing integration and interdependence of economies, societies, and cultures worldwide. It involves the free movement of goods, services, capital, people, and ideas across borders. While it offers opportunities for economic growth, it also raises concerns about job losses, cultural homogenisation, and environmental impacts.

Worked Example

Problem: Explain how a depreciation of a country's currency can impact its balance of trade.

Solution:

• A depreciation of a country's currency makes its exports relatively cheaper for foreign buyers, increasing the demand for its exports.
• At the same time, it makes imports relatively more expensive for domestic consumers, reducing the demand for imports.
• The combined effect of increased exports and decreased imports can improve the country's balance of trade (i.e., reduce a trade deficit or increase a trade surplus).