ECONOMICS

INTERNATIONAL TRADE

Trade between countries take place because countries are unable to produce all of the goods
and services that they want or need and allow countries to sell off any excess goods they may
have.

International trade also provides the country with additional income in the form of revenue
from exports which are sold to other countries and also allows the establishing of “Allies” or
friendship between countries.

International Trade is also known as foreign trade and acts to improve the standard and quality
of life of the people.

Terms commonly used in international trade are:

Imports – goods and services purchased from another country. As a result of this exchange
money must leave your country to pay for such purchases. (-)

Exports – goods and services produced locally and sold to other countries. This results in an
inflow of currency into the country. (+)

Visible Trade – this refers to the imports/export of physical goods e.g. crawfish, pineapples,
salt, plastic goods.

Invisible Trade – The importing/exporting of services e.g. Tourism, Banking, Transportation,

Insurance, Education, Health Care.

Countries have to earn money to spend on things they need. Money is earned by the sale of
goods and services overseas (exports) which in turn will bring money into the country that can
now be used to make purchases from other countries, (imports).

If a country earns more than they spend, they build up a surplus, become wealthy and generally
have a higher standard of living. The opposite is also true.

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1. Balance of Trade
The difference in the amount of goods (tangible), leaving the country(export which brings in
money)and goods coming into the country (imports which takes money out of the country), is
the country’s Balance of Trade.
Exports ˃ Imports = Balance of Trade is Favorable/Surplus (Inflow of capital – Country earned
more than it spent)

Exports ˂ Imports = Trade gap is Unfavorable/Deficit/Adverse (Outflow of capital – Country

earned less than it spent)

Balance of Trade calculations:

i) Visible Imports - $500
Visible Exports + $600
Balance of Trade + $100 surplus, favorable

ii) Visible Imports -$48,440

Visible Exports +$47,322
Balance of Trade -$1118 unfavourable, Deficit, adverse

2. Invisible Balance
Invisible trade includes services such as Banking, Insurance, Transportation (Shipping),
Interest/Dividends, Travel & Tourist, Education, Health, (intangible).

When Invisible Exports ˃ Invisible Imports = Favorable/Surplus

When Invisible Exports ˂ Invisible Imports = Unfavorable/Deficit/Adverse

i) Invisible Imports - $800

Invisible Exports + $1000
Invisible Trade + $200 surplus, favorable

ii) Invisible Imports - $49,000

Invisible Exports + $32,300
Invisible Trade - $16,700 unfavourable, Deficit, adverse

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3. Balance of Payments (Current Account)
The Balance of Payment /Current account consists of Balance of Trade (Visible goods), and
Invisible Balance (Services).

4. Balancing Item
Also included are Transfer Payments which are not payment for goods & services but are gifts
or grants in the form of money, e.g. i) gifts of money sent to/from families abroad, ii) grants
made to aid other countries, iii) grants to develop countries and international organizations.

Example #1 : Balance of Payments/Current Account calculations:

Visible Imports - $500

Visible Exports + $600
1) Balance of Trade + $100 surplus/favorable

Invisible Imports - $300 -$50 unfav

Invisible Exports + $150
2) Invisible Balance -$150 deficit/unfavorable

3) Current Account Balance (Bal. of Pymt) - $50 unfavorable

Capital Account - $120

Transfer Payment + $500
Net assets/liabilities + $380 favourable
4) Balancing Item + $330 favourable
===============

Example #2 Balance of payment/Current Account

Visible Imports - $48,440
Visible Exports + $47,322
a) Balance of Trade ________

Invisible Imports - $25,650

Invisible Exports + $23,120
b) Invisible Balance _________

c) Current Account Balance _________

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 Transaction in external assets/liabilities
Capital Account +$6,500
Investment -$1,200
d) Net assets/liabilities ___________
e) Balancing Item __________
Classwork
Using the information below complete the Balance of Trade, Invisible Balance,
Balance of Payment and Balancing Item.

Invisible Import -68,719

Invisible Export +76,202
Private Investment -20,634
Transactions by US Banks +10,494
Changes in Foreign currency
Reserve -2,891
Visible Exports +72,843
Visible Imports - 81,305
Other capital Transactions +2,284

Balance of payment/current account

Visible Exports
Visible Imports
1) Balance of Trade ________

Invisible Import
Invisible Export
2) Invisible Balance _________
3) Balance of Payment _________

Private Investment -20,634

Transactions by US Banks +10,494
Foreign Currency reserve -2,891
Other capital Transactions +2,284
Net transactions in external assets
and liabilities __________
4) Balancing Item ___________

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Invisible Trade

Invisible Imports Invisible Exports

Tourism Tourism

Transportation Transportation

Education Education

Insurance Insurance

Banking Banking

Balance of Payments Deficits (Unfavourable)

If a country is experiencing a persistent deficit in their balance of payments, it will be getting
into debt with the rest of the world. This deficit can only be tolerated for a short time, so it
must be corrected.

Factors leading to Current Account Deficit

1) An increase in imports or a decrease in Exports.
2) Over spending by the government on foreign products.
3) Increase cost of capital goods including technology.

There are temporary measures that a country can take to correct an adverse Balance of
Payment problem as they are not satisfactory in the long run. These temporary measures may
include:

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 - Borrow from International Monetary Fund (IMF)
- Obtain Loans from abroad
- Take money from their official gold and foreign currency reserves.
- Selling off foreign assets

The best solution for this problem in the long run is to increase exports. Governments can help
to achieve this by offering incentives to firms involved in exporting goods. (Tax Relief, Special
Credit Facilities, Subsidies)

Other strategies the government can use include:

i) Exchange control – Central Bank can place a limit on the outflow of foreign
currency that can be purchased, meaning a decrease in imports.
ii) Import control - Tariffs and Quotas are 2 main methods used to
restrict imports.

We know that a country can borrow money from overseas, but there are limits on how much
they can borrow from abroad or from their foreign currency reserve.

Sources of Overseas Loans

There are 2 main sources of loans available to any country:

i) IMF (International Monetary Fund)

-Provides short term loans to countries with Balance of Payment problems. (Deficit).
- Member countries each pay a subscription call a ‘quota’ depending on their wealth.
- These funds are pooled together and is available for members to borrow.
-However, before funds are lent out, the IMF sends out a team to examine the country’s
financial records. They may then make certain suggestions and set goals for fiscal and
monetary policies to be implemented. In extreme cases, the remedy may mean currency
devaluation.

Question: We know that VAT was implemented to assist with paying our
National Debt. The present Government is set to implement the following
policies:

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 i) Decrease VAT to 10% on all goods and services
ii) Add VAT to previous bread basket items that had no VAT
charges.
What would be the impact of such a decision on our economy? (8)

ii) World Bank

- This is the sister institution to the IMF and is made up of about 187 countries who are
members and pay a subscription.
-The bank grants loans to countries which must be repaid over a period of 6 – 35 years. These
long-term loans are to assist member countries with economic development.

Balance of Payment Surplus.

A surplus on the other hand has provided the country with excess wealth which can be used to
do the following:
i) Increase the nation’s foreign currency reserves
ii) Pay off government’s foreign and local debt
iii) Make loans to other countries
iv) Implement government projects
v) Purchase foreign Investments, shares of other countries etc.

Absolute/Comparative Advantage in International Trade

Absolute Advantage
States that when a country is able to produce a variety of products cheaper than other
countries, they will concentrate on those products with the lowest production cost.

Example: Assume that 2 countries (Country A and Country B) trade only 2 products: Computer
and Sugar, and they both have the same amount of resources. The cost of each item given the
set resources is shown below.

Cost per unit

Computer Sugar
Country A $600 $80

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 Country B $500 $100

When we compare the cost of producing computers, Country B can produce it cheaper (more
efficiently) than country A, ($500 vs. $600), so Country B has an ABSOLUTE ADVANTAGE in the
production of computers and Country A an ABSOLUTE ADVANTAGE in producing sugar.

The country with the Absolute Advantage can produce and sell their product much cheaper on
the International market, so country A would specialize in the production and export of sugar
and country B in computers.

Which country will have the Absolute Advantage for the 2 products below?

Cost per unit

Rice Cloth
Country X $10 $18
Country Y $20 $8

Comparative Advantage
A comparative advantage occurs when a country do not have an Absolute Advantage in the
production of goods and services, so they will produce the good with the lowest opportunity
cost when compared to other countries with the same resources.

Assume:
Cost per unit
Rice Cloth
Country X $100 $50
Country Y $5 $20

Country Y have the absolute advantage in the production of rice and cloth.

Country X must now produce the product with the lowest opportunity cost, because they have
no Absolute Advantage. This will give them a Comparative Advantage in the production of that
product.

Calculating Comparative Advantage

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 $100 $50
Rice Cloth
Country X $50/$100. Country X $100/$50. Country X
has to give up 0.5 cloth has to give up 2 rice
to obtain 1 Rice for 1 cloth
Country Y $20/$5. Country Y has $5/$20. Country Y
to give up 4 cloth to has to give up 0.25
obtain 1 Rice rice to obtain 1 cloth
$5 $20

Country X has only to give up 0.5 cloth to get 1 rice

Country Y has only to give up 4 cloth to get 1 rice

Country X has a lower opportunity cost in the production of rice, (only giving up 0.5 as opposed
to 4 cloth). Country X have a comparative advantage in the production of rice.

Country X has only to give up 2 rice to get 1 cloth

Country Y has only to give up 0.25 rice to get 1 cloth

Country Y has a lower opportunity cost in the production of cloth, (only giving up 0.25 rice as
opposed to 2). Country Y have a comparative advantage in the production of Cloth.

Country X should specialize in rice and country Y in cloth.

Assignment:
Using the information below, calculate the comparative cost and indicate which country should
produce which product.

Assume:
Cost per unit
Computer Sugar
Country A $600 $200
Country B $500 $100

Computer Sugar
Country A
200/600=.33 600/200=3

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 Country B
100/500=.20 500/100=5

Class work - Absolute/Comparative Advantage

1. Discuss the difference between absolute advantage and comparative advantages.(4)

2. Why do countries choose to engage in international trade? (Include both import and
export side of the argument.)(4)
3. Consider the following cost data:

Pair of Pants Pocket calculator

Guyana $18 $12
Belize $14 $7

(Show calculation – 4pts.)

a) Which country is has an Absolute Advantage in i) Pants ii) pocket calculators. (2)

b) How many pocket calculators have to be given up to produce one pair of pants in i)
Guyana, ii) Belize. (2)

c) Which country has the lowest opportunity cost in the production of pocket
calculators? (2)

d) If these 2 countries decide to specialize and trade with one another, in which good
should i) Guyana specialize ii) Belize specialize. (2)

Problems Faced by Exporters

1. Language = Exporters must be able to communicate with customers by hiring an

individual/ translator who is familiar with the language and knowledgeable
about the product.

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2. Product Acceptability – Products must meet the standards of the market the
exporter wishes to sell them to (quality, culture, health, religious).
3. Import regulations – Import regulations for each country varies. The exporter must
be familiar with these regulations in order to be successful.
4. Transit Risk – Goods travelling to various destinations face the risk of damage or
theft. Most of these risks can be covered by insurance.
5. Arranging Transportation – The exporter must find adequate transportation for his
product. In most countries there is a department set up for
international shipping.
6. Foreign Currency – Currency exchange between countries are constantly changing,
so the value of the currency when the trade took place may not be the
same as when the funds are collected 30 days later.

Why countries restrict their Trade

1. Balance of payments problems
If a country is spending more money on imports than exports they are getting into debt
with the rest of the world and would need to decrease their imports to correct the
situation.

2. To protect New local industries

A newly established industry operating on a small scale will not be able to complete
with large scale foreign imports. To protect them the government may place a tariff or
quota on imports.

3. Unfair competition from low wage countries

Imports from low wage countries like China, make it difficult for our local companies to
compete. The government can restrict import or placed a tariff/ quota on these good.
4. To prevent dumping
A country may restrict imports when they believe that other countries are dumping
their products into your country. These products may be of inferior quality or a
company trying to get rid of their excess goods. This will lower the cost and drive the
competition out of the market
Methods used to control goods entering the country

The following are methods used to control the amount of goods coming into and going out of a
country.

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 1) Embargo – This is a government ban on trade between countries.
2) Tariffs – This is a tax placed on imported goods, so goods coming into the
country will be more expensive. This is usually implemented when the
government wants to encourage the purchase of local products.
3) Quotas – Government places a restriction on the quantity of a particular good
that is allowed to enter the country at any given period of time. This too was
implemented to discourage imports and encourage local trade. e.g. when local
crops are in season, there be a limit placed on the import of that products (sweet
pepper)

4) Exchange Control – Imports can only be purchased with foreign currency. The
government can limit imports by restricting the amount of foreign currency made
available to companies.

5) Subsidies – The offer of financial assistance to local businesses from the

government e.g. farmers, fisheries, manufacturing, in order to make their prices
much lower than similar imported products.

Bahamas Customs Department

The Key role of the Customs Department is to:
- Collect and protect customs revenue
- To protect our borders from illegal goods.

Class work exercise

1. Why do countries need to trade? (2)

2. Define the terms import and export. (4)
3. What is the difference between Absolute and Comparative advantage? (4)

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4. Define Balance of trade and Balance of Payments. (4)
5. Give 3 examples of visible and 3 examples of invisible goods and services.
(6)
6. What would cause a surplus and what will result in a deficit balance of
payments? (4)
7. Give 4 examples of options that a country has when there is a deficit. (4)
8. What can be done with the surplus received from trading? (Name 3) (3)
9. Briefly describe how an exporter can sell their goods abroad without
actually going overseas? (2)
10.What are three problems that can be experienced with fluctuating
exchange rates? (6)
11.What are; Tariffs, Quotas and Embargo? (6)
12.In what way would a subsidy offered to local businesses assist in
international trade? (3)
13.Identify 4 main reasons why countries would restrict trade. (4)

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