Economics-For Managers

Macroeconomics : International Trade and Balance of Payments : Chapter 19

International trade plays a major role in the economic development of a country. There are two schools of thought as regards trade. One school favors free trade while the other advocates protectionism. According to the theory of absolute advantage, if a country can produce a good cheaper than other countries, it would have absolute advantage in the production of that good. Countries should produce and export surpluses of goods in which it has absolute advantage and buy whatever else they need from other countries.

To protect domestic industries from competition, government imposes barriers. The barriers can be both tariff and non-tariff. Tariff barriers include advalorem duties, specific duties and compound duties. Non-tariff barriers include quotas, subsidies, licensing, administered protection, and health and safety standards.

The world is becoming an integrated market place and trade equations are changing rapidly. Realizing the importance of private capital inflow for the development of a country, many countries are taking numerous measures to attract foreign investors. Balance of Payment (BoP) can be defined as a systematic record of all economic transactions between the residents of the reporting country and the residents of the rest of the world.

Disequilibrium in the BoP can be corrected with the help of both monetary and non-monetary measures. Monetary measures include deflation, exchange rate depreciation, devaluation and exchange control. Non-monetary measures include tariffs (import duties), import quotas and export promotion polices and programmes.

Exchange rate means the price of one currency in terms of another. Exchange rates are either fixed by governments or determined by the market forces. The two basic exchange rate regimes are the fixed exchange rate and the floating/flexible exchange systems.

Chapter 19 : Overview