Chap 01 and 13
- 1. PRESENTATION ON INTERNATIONAL TRADE & FINANCE OUR TOPICS CHAPTER: 01 -INTRODUCTION And CHAPTER: 13- THE BALANCE OF PAYMENTS
- 3. The exchange of goods or services along international borders. This type of trade allows for a greater competition and more competitive pricing in the market. The competition results in more affordable products for the consumer. The exchange of goods also affects the economy of the world as dictated by supply and demand, making goods and services obtainable which may not otherwise be available to consumers globally. International trade
- 4. International trade Vs. Interregional trade.(Factor mobility) International National Restrictive immigration laws – which prevent free mobility of labour from one country to another . Capital restriction – the inflow and outflow of capital and investment across national frontiers. Such differences, may not exist or may not appear too formidable to be overcome by economic incentives.
- 5. International trade Vs. Interregional trade.(Factor mobility) International National These legal barriers which prevent the free flow of labour and capital in and out of countries. Several other barriers –social ,cultural and political differences in language, climate, social customs and practice political, and educational systems etc. There are several obstacles to the movements of factors within the country and they range from simple.
- 6. International trade Vs. Interregional trade.(Factor mobility)
- 7. International trade Vs. Interregional trade(cont’d)(Product mobility) National trade. International trade. Natural barriers – The only internal barriers to free movement of goods and services are the distance and cost of transportation. Formidable man-made barriers: there are import and export duties and quotas, exchange controls, non- tariff(hidden)barriers. Internal trade is relatively free to develop within a particular nation. From this standpoint,international trade is quite different from internal trade in goods and service.
- 10. International trade Vs. Interregional trade(cont’d)(Economic environment ) National trade. Inte rnational trade significantly different from that of domestic trade Legal framework – the laws governing consumption production and exchange of goods and services are the same throughout the country . Government policies- with regard to interest rates taxes . Wage or prices are the same within the country .Production techniques, factor proportion , factor prices , infrastructure facilities and production functions or possibilities are nearly the same in the country . Market structures- the degree of competition or monopoly in production –consumer taste patterns and preferences are more or less the same throughout the country.
- 11. International trade Vs. Interregional trade(cont’d) Monetary units: National trade International trade Single currency unit- Monetary laws and the financial systems an arrangements are the same for all regions . there are no currency complications or convertibility problems involved in carrying out domestic trade. Multi currency unit. Dollars,yens,pounds,marks,fra ncs,rupees and a thousand other currencies used in and not all of them are freely acceptable in discharge of international monetary obligations . For example, The Indian importer must first obtain US dollars before he can think of buying goods from the United States.
- 12. International trade there are currency complications, problems of non- convertibility of currencies ,exchange controls and restrictions and many other obstacles. international monetary differences ,therefore introduce complications and complexities in international transactions
- 14. History of International Trade International trade has been in vogue for centuries and all civilizations carried on trade with other parts of the world. The need for trading exists due to the variations in availability of resources and comparative advantage. In the present context where technology and innovation in all fields have thrown open borders to globalization, no country can afford to remain isolated and be self-sufficient.
- 15. Launch of International trade International trade has a rich history starting with barter system being replaced by Mercantilism in the 16th and 17th Centuries. The 18th Century saw the shift towards liberalism.
- 16. Launch of International trade(cont’d) Adam Smith (1723- 1790), the father of Economics wrote the famous book ‘The Wealth of Nations’ in 1776 where in he defined the importance of specialization in production and brought International trade under the said scope.
- 17. Launch of International trade (cont’d) David Ricardo(1772- 1823) developed the Comparative advantage principle, which stands true even today.
- 18. MD. RAKIBUL ISLAM PIKUL ID-B120203002
- 19. Influences of David Ricardo’s principle All these economic thoughts and principles have influenced the international trade policies of each country. Though in the last few centuries, countries have entered into several pacts to move towards free trade where the countries do not impose tariffs in terms of import duties and allow trading of goods and services to go on freely.
- 20. Moving towards professionalism The 19th century beginning saw the move towards professionalism, which petered down by end of the century.
- 21. Moving towards professionalism(cont’d) Around 1913, the countries in the west say extensive move towards economic liberty where in quantitative restrictions were done away with and customs duties were reduced across countries. All currencies were freely convertible into Gold, which was the international monetary currency of exchange. Establishing business anywhere and finding employment was easy and one can say that trade was really free between countries around this period.
- 22. Recession in world war & post war The First World War changed the entire course of the world trade and countries built walls around themselves with wartime controls.
- 24. Recession in world war & post war(cont’d) Post world war, as many as five years went into dismantling of the wartime measures and getting back trade to normalcy. But then the economic recession in 1920 changed the balance of world trade again and many countries saw change of fortunes due to fluctuation of their currencies and depreciation creating economic pressures on various Governments to adopt protective mechanisms by adopting to raise customs duties and tariffs.
- 25. World Economic Conference The need to reduce the pressures of economic conditions and ease international trade between countries gave rise to the World Economic Conference in May 1927 organized by League of Nations where in the most important industrial countries participated and led to drawing up of Multilateral Trade Agreement. This was later followed with General Agreement of Tariffs and Trade (GATT) in 1947.
- 26. Depression of 1930s However once again depression struck in 1930s disrupting the economies in all countries leading to rise in import duties to be able to maintain favorable balance of payments and import quotas or quantity restrictions including import prohibitions and licensing.
- 28. Reviewing international trade policies Slowly the countries began to grow familiar to the fact that the old school of thoughts were no longer going to be practical and that they had to keep reviewing their international trade policies on continuous basis and this interns lead to all countries agreeing to be guided by the international organizations and trade agreements in terms of international trade.
- 29. The Road Ahead Today the understanding of international trade and the factors influencing global trade is much better understood. The context of global markets have been guided by the understanding and theories developed by economists based on Natural resources available with various countries which give them the comparative advantage, Economies of Scale of large scale production, technology in terms of e-commerce as well as product life cycle changes in tune with advancement of technology as well as the financial market structures.
- 30. Necessary to understand the background For professionals who are occupying management or leadership positions in Organizations, understanding the background to the international trade and economic policies becomes necessary as it forms the backdrop for the business organizations to charter their course for growth.
- 31. Md. Mahabuble Islam Mithun B-120203027
- 32. Balance Of Trade - BOT The difference between a country's imports and its exports. Balance of trade is the largest component of a country's balance of payments. Debit items include imports, foreign aid, domestic spending abroad and domestic investments abroad.
- 33. Balance Of Trade - BOT Credit items include exports, foreign spending in the domestic economy and foreign investments in the domestic economy. A country has a trade deficit if it imports more than it exports; the opposite scenario is a trade surplus. Also referred to as "trade balance" or "international trade balance."
- 34. The Balance of Payments(BOP) The balance of payments is a summary statement of all the transaction of the residents of a nation with the rest of the world during a particular period of time, Usually a year. Its main purpose is to inform monetary authorities of the international position of the nation and to aid banks, firms, and individuals engaged in international trade and finance in their business decisions.
- 36. Balance of payments on current account Balance of payments on current account includes the sum of three balances viz . a) Merchandise balance, b) service balance and c) unilateral transfers balance . In other words, it comprises of trade balance (in meade’s sense) and transfers balance . Balance of payment on current account is also referred to as net foreign investment because the sum represents the contribution of foreign trade to GNP
- 37. Balance of payments on current account(cont’d) It is also worth remembering that BOP on current account covers all the receipts on account of earnings (or opposed to borrowings )and all the payments arising out of spendings (as opposed to lendings )
- 38. Balance of payment on capital account The classical economists built models of trade assuming that only goods and services move across international boundaries . International capital movements viewed in that light, where and impossibility perhaps for this reason, we do not have a well developed theory of international capital movement. International capital movements in and out of countries are a fact of life and very much a reality in today’s world.
- 39. Balance of payment on capital account(cont’d) Less developed countries are the net recipients of foreign capital and investment and some see it as an opportunity for these countries to maximize their rate of growth and minimize their balance of payments hardship. Returning to the question of BOP accounting procedure, all the transactions involving inward or outward movement of capital and investment are included in the capital account of the BOP of the reporting country.
- 41. Balance of payment on capital account(cont’d) In simple terms, the BOP capital account comprises of the long- term and short- term capital accounts. Developed countries (DCs) are the net exporters of capital and investment the less developed countries (LDs) are the net borrowers of foreign capital and investment. DCs would experience deficits in their BOP capital accounts; the LDCs, on other hand, would “enjoy” capital account surpluses in their BOP.
- 42. Balance of payment capital account(cont’d) LDCs are net browsers of foreign capital and recipients of foreign investment, and to that extent they would “enjoy” favourable BOP trends. This is undoubtedly true. But sooner or later this foreign capital and investment will have the LDCs and go back. The returns on that capital and investment in the form of profits , interest ,dividends, and royalties would be repatriated from the host” countries to the “home” countries (in this case from LDCs to DCs ). And this sum would create deficit tendencies in the Current Account of the BOP of the LDCs con concerned. In other words, capital account surplus of present year will create current account deficits of a potential nature (in the form of investment income outflows).
- 43. Balance of payment capital account(cont’d) For the years ahead . In that sense, the country which enjoys a capital account surplus today must get ready to “suffer” a current account deficit in future. By making productive use of foreign capital and investment and increasing both the GNP and export capacity the LDC can avoid future BOP deficits on current account. It much depends on the manner in which foreign capital and investment are put to use in t6he receiving country. If they are put to unproductive use resulting in no expansion of real out put of goods and services,
- 44. Balance of payment -capital account(cont’d) then of course, it would be true to say that today’s capital account surplus is tomorrow’s current account deficits. Today’s deficits (in capital account ) is truely tomorrow’s surplus. However , the significant of BOP deficits and surpluses arising out of transactions in capital account can , therefore , be seen only with a time perspective and future prospects clearly in mind. Only then can the significant of capital account in the BOP be fully understood.
- 45. Official reserves account The official reserves account is the total currency and metallic reserves held by official monetary authorities within the country. These reserves are normally composed of the major currencies used in international trade and financial transactions (so-called hard currencies like the U.S. dollar, German mark, Japanese yen, British pound, Swiss France, French franc, and Canadian dollar) and gold.
- 47. Official reserves account(cont’d) The significance of official reserves depends generally on whether the country is operating under a a) fixed exchange rate regime or a b) floating exchange rate system. If a country's currency is fixed, this means that the government of the country officially declares that the currency is convertible into a fixed amount of some other currency. For example, for many years the South Korean won was fixed to the U.S dollar at 484 won equal to 1 U.S. dollar. If the exchange rate is fixed, the government accepts responsibility for maintaining this fixed rate (also called parity rate). If for some reason there is an excess of Korean won on the currency market, to prevent the value of the won from falling, the South Korean government must support the won. Supporting a currency is identical to supporting any price. To push a price up you must increase demand.
- 48. Official reserves account(cont’d) Under these conditions, the South Korean government would go the currency markets and purchase its own currency until it eliminated the excess supply. But what does the South Korean government use to purchase South Korean won? It uses other major currencies like the dollar, the mark, the yen, or even gold. Therefore in order for a country with a fixed exchange rate to be able to support its own currency, the country needs to maintain substantial reserves of foreign currencies and gold, official reserves.
- 49. Official reserves account(cont’d) Many countries still use fixed exchange rate systems. For them it is still critically important to maintain official reserves in sufficient quantity to support their own currencies in case of need. However many of the major industrial countries, such as the United States and Japan, no longer operate under fixed exchange rates. For these countries, holdings of official reserves are not as critically important and have in fact declined substantially over the past two decades in proportion to the volume of international trade and investment.
- 50. CLASSIFICATION OF INTERNATIONAL TRANSACTIONS International transactions are classified as credits or debits. Credit transactions are those that involve the receipt of payments from foreigners. Debit transactions are those that involve payments to foreigners. The export of goods and services, unilateral transfers from foreigners and capital inflows are credits and are entered with a positive sign. The import of goods and services, unilateral transfers to foreigners, and capital outflows are debits and are entered with a negative sign. Each transaction is recorded twice, once as a credit and once as a debit of an equal amount. This is known as double-entry bookkeeping.
- 52. Double-Entry Bookkeeping Double-entry bookkeeping means that each international transaction is recorded twice,once as a credit and once as a debit of an equal amount. The reason for this is that in general every transaction has two sides.We sell something and receive payment for it.We buy something and we have to pay for it.
- 53. Double-Entry Bookkeeping(cont’d) For example , suppose that a U.S firm exports $500 of goods to be paid for in three months. The entire transaction is entered as follows in the U.S balance of payments. Credit (+) Debit(-) Goods exports Capital outflow $500 $500
- 54. Double-Entry Bookkeeping(cont’d) As another example of double-entry bookkeeping , suppose that a U.S resident visits London and spends $2000 on hotels ,meals , and so on .The U . S. resident is purchasing travel services from foreigners requiring a payment.(this is similar to a U.S import). The entire transaction is entered as follows in the U.S balance of payments. Credit(+) Debit(-) Travel services purchased from foreigners Capital inflow $200 4200
- 55. Double-Entry Bookkeeping(cont’d) As a third example , assume that the U.S government gives a U.S bank balance of $100 to the government of a developing nation as part of the U.S. aid program. The United states debits unilateral transfers for the $100 gift given (payment made) to foreigners. The entire transaction is thus: Credit(+) Debit(-) Unilateral transfers made Capital inflow $100 $100
- 56. Double-Entry Bookkeeping(cont’d) As a fourth example ,suppose that a U.S. resident purchases a foreign stock for $400 and pays for it by increasing foreign bank balances in the United States. Note that both sides of this transaction are financial: Credit(+) Debit(-) Capital outflow(the purchase of the foreign stock by the U.S. resident) Capital inflow(the increase in foreign bank balance in the United States) $400 $400
- 57. Double-Entry Bookkeeping(cont’d) Finally, suppose that a foreign investor purchases $300 of U.S. treasury bills and pays by drawing down his bank balance in the United States by an equal amount. Credit( +) Debit( -) Capital inflow (the purchase of U.S. treasury bills by a foreigner) Capital outflow (the reduction in foreign bank balances in the U.S. $300 $300
- 58. Double-Entry Bookkeeping(cont’d) If we assume that these five transaction are all the international transaction of the United States during the year, then the U.S. balance of payments is as follow: Credit(+) Debit(-) Goods Services Unilateral transfers Capital, net balance Total debits and credits $500 $200 $100 $200 $500 $500 . Total debits equal total credits because of double-entry bookkeeping.