International Trade: Concepts and Mechanisms
International Trade:
International trade is necessary because it justifies the obtention of goods not available in a country. Its origin is due to the following factors:
- Production costs: These depend on production factors, such as technology and labor, which decisively influence the price of goods and services.
- Demand: International trade is fostered because it is difficult for one country to produce everything necessary to satisfy its inhabitants’ needs. Each country’s production may not meet national demand adequately, either because it does not exist or because the supply is insufficient.
Customs Territory
A customs territory is a geographical area where there is free movement of goods, and its borders do not necessarily coincide with the political borders of a country.
Specialization and Comparative Advantage
Countries discovered centuries ago that they have a comparative advantage in producing goods they are relatively more competent at. International trade allows the division of labor and specialization of countries in specific goods and services, increasing efficiency.
Theory of Comparative Advantage
Countries try to specialize in the production of goods and services that they can exchange more efficiently in the international market.
Protectionism
Protectionism is a set of actions aimed at restricting the entry of foreign products to protect domestic industries. The main protectionist measures include:
- Protection of strategic public industries: For example, national defense.
- Industrialization and job creation: This aims to substitute foreign products with national ones and increase national benefits through worker salaries.
- Development of emerging industries: These need time to develop competitive technology and economies of scale.
- Revenue collection: Charging importers constitutes a source of income for authorities.
Measures to brake imports from other countries:
- Import taxes: Customs taxes, called tariffs, increase the price of imported products, making it more difficult for them to compete nationally.
- Import quotas: These establish limits on the amount of certain goods that can be imported.
- Industrial and commercial policies: These favor national industries and their expansion, giving them an advantage over foreign companies.
- Non-tariff barriers: These measures jeopardize imports, for example, through mandatory deposits before imports.
Real Exchange Rate
The real exchange rate is a country’s relative position compared to those it trades with. To know if it has improved or worsened, the price variation of imported products is compared with the price variation of exported products.
Free Trade
Free trade policies promote free competition in the international market. Trade is based on the absence of commercial barriers, which allows the implementation of the theory of comparative advantage. The advantages of free trade are:
- More efficient use of production factors: Countries increase their production possibilities by specializing in their comparative advantages.
- Increased competition: The entry of foreign competitors forces domestic companies to become more efficient.
- Greater variety and quantity of goods and services: Without international trade, certain products would not exist or would be scarce.
- Economies of scale: Taking advantage of economies of scale requires increasing production to reduce costs.
Balance of Payments
The balance of payments is a record of all economic transactions between residents of a country and the rest of the world over a specific period, usually one year.
Double-Entry Accounting
The double-entry accounting system records transactions in two ways: the value of goods received or delivered, and the money delivered or received.
Structure of the Balance of Payments
- Current Account Balance: Records transactions of goods, services, income, and current transfers.
- Capital Account Balance: Records capital transfers and the acquisition of non-financial assets.
- Financial Account Balance: Records investments and variations in reserves.
- Errors and Omissions.
Currency Market
When countries import goods from others, they must make payments in currencies other than their own. The currency market allows the exchange of one currency for another. It is important to consider:
- Convertibility: The ability to transform one currency into another. Only certain currencies are convertible, and some have restrictions.
- Financial intermediaries: These charge a commission for exchanging currencies, adding to the cost of the transaction.
Types of Exchange Rates
- Fixed exchange rate: The price of a currency is fixed by monetary authorities. When the rate is modified, it is called devaluation if it increases, and revaluation if it decreases.
- Market exchange rate: The price of a currency is determined by supply and demand in the market. When a currency’s value increases, it is called appreciation, and when it decreases, it is called depreciation.
Market Dynamics
There are two possibilities:
- Appreciation: When a scarce currency rises in value due to high demand.
- Depreciation: When a currency is abundant due to excess supply or a scarcity of other currencies.
Supply and Demand of a Currency
The supply and demand of a currency cause exchange rates to fluctuate continuously. The main reasons for demand in the international market are:
- Exports and imports of goods and services.
- Inflation rates.
- Interest rates.
- Forecasts of appreciation or depreciation.
- Actions of monetary authorities.
International Monetary System
The international monetary system consists of the forms of fixed exchange rates, or ways of setting the price of currencies. The monetary systems used are:
- Free float: The price of a currency is determined by supply and demand, without intervention from monetary authorities.
- Dirty float: The monetary authority intervenes in the market in certain cases, buying or selling foreign currency to influence its value.
- Adjustable peg: The system is similar to a free float, but the monetary authority intervenes within a predetermined range.
- Fixed: A currency is pegged to another, usually a strong currency like the dollar.
European Union
The European Union includes: Germany, Austria, Belgium, Bulgaria, Cyprus, Denmark, Spain, Slovenia, Slovakia, Estonia, France, Finland, Greece, Hungary, Ireland, Italy, Lithuania, Latvia, Luxembourg, Netherlands, Portugal, Poland, Czech Republic, Romania, Malta, and Sweden.