Trends in International Trade
Most of them employ foreigners in their management team, denying the locals a chance to get employed
International Financial Institutions
Some of the institutions that play a role in international monetary system include;
International Monetary Fund (I.M.F)
This bank operates like the central bank of the central banks of the member countries. Its objective includes the following;
African Development Bank (A.D.B)
This bank was formed to promote the economic and social progress of its regional member countries in Africa. It main source of finance is the members’ contributions and the interest charged on the money they lend members.
Its functions include;
African Development Fund (A.D.F)
This was formed to provide long term financial assistance to the low income countries that cannot obtain loan from other financial institutions at the prevailing terms and condition. Their loans may recover a longer repayment periods with no interest except the commitment fees and service charge which is minimal.
They fund activities, which includes;
International Bank for Reconstruction and Development (World Bank)
The World Bank was formed to carry out the following functions;
This occurs where two or more countries enter into a mutual agreement to cooperate with each other for their own economic benefit. They may do this by allowing free trade or relaxing their existing trade barriers for the member countries.
Economic integration may occur in the following forms;
Free Trade Area
This is a case where the member countries agree to abolish or minimize tariffs and other trade restrictions but the individual countries are free to impose restrictions on non-member countries. They includes; Preferential Trade Area (P.T.A), European Free Trade Area (E.F.T.A), Latin America Free Trade Area (L.A.F.T.A), etc.
This is where the members of the free trade area may agree not only to abolish or minimize their tariffs, but also establish a common tariff for the exchange of goods and services with the non member countries. They include; Economic Community of West Africa States (E.C.O.W.A.S), East Africa Custom Union (E.A.C.U), Central Africa Custom and Economic Union (C.A.C.E.U)
This is where the member countries allow for free movement of factors of production across the boarders. People are free to move and establish their business in any member country. They include; East Africa Common Market (E.A.C.M), European Economic Community (E.E.C), Central American Common Market (C.A.C.M), Common Market for Eastern and Southern Africa (COMESA)
This is where the members of the common market agree for put in place a common currency and a common central bank for the member countries. They even develop common infrastructures which includes railways, communication networks, common tariffs, etc
Importance of economic integration
Economic integration will ensure the following benefits for the member countries;
Free Trade Area
This is a situation where there is unrestricted exchange of goods and services between the countries. It has benefits/advantages similar to those of economic integration.
Disadvantages of free trade area
Some of the problems it is likely to bring include;
These are deliberate measures by the government to limit the imports and exports of a country.
They are also known as protectionism and include the following;
Reasons for trade restrictions
Advantages of trade restrictions
Disadvantages of trade restriction
TERMS OF TRADE
This refers to the rate at which the country’s export exchanges with those from other country. That is:
It determine the value of export in relations to import so that a country can know whether its trade with the other country is favourable or unfavourable
Favourable terms of trade will make the country spent little on import and gain a lot of foreign exchange from other countries
Then table below shows trade between Kenya and China in the year 2004 and 2005, with the Kenyan government exporting and importing to and from china, and China also importing and Exporting from and to Kenya.
Calculate the Terms of trade for;
BALANCE/IMBALANCE OF TRADE
Factors that may lead to either favourable or unfavourable terms of trade
The country is experiencing a favourable terms of trade if:
The country will experience unfavourable terms of trade if;
Reasons for differences in terms of trade between countries
The terms of trade may differ due to:
Balance of trade
This is the difference between value of country’s visible exports and visible imports over a period of time. If the value of visible/tangible export is higher than the value of visible/tangible imports, then the country experiences favourable terms. If less than the invisible value, then the country is experiencing unfavourable. The country is at equilibrium if the value of visible export and import is the same,
BALANCE OF PAYMENT
This is the difference in the sum of visible and invisible export and the visible and invisible imports. If positive then it means the country is having favourable terms, while if negative, then it means unfavourable It goes beyond the balance of trade in that it considers the following
Balance of Payment account
This is the summary showing all the transactions that have taken place between a particular country and the rest of the world over a period of time. The transaction may arise from
Components of balance of payments account
The balance of payment account is made up of the following
Balance of payment on current account
This is the account that is used to determine the difference between the value of the country’s visible and invisible imports and exports. That is
In the account, the payments for the visible and invisible imports are debited while the receipts from visible and invisible exports are credited that is
A given country had the following values of visible and invisible export and import during the year 2004 and 2005
Prepare the country’s balance of payments on current account for the years 2004 and 2005 and comment on each of them.
Balance of payments on capital account
This account shows the summary of the difference between the receipt and payments on the investment (capital). Receipts are income from investments in foreign countries while payments are income on local investments by foreigners paid out of the country. The capital inflow includes investments, loans and grants from foreign donors, while capital outflow includes dividends paid to the foreign investors, loan repayments, donations and grants to other countries. In the account the payments are debited, while the receipts are credited. That is;
The official settlement account
This account records the financial dealings with other countries through the IMF. It is also called the foreign exchange transaction account, and is always expected to balance which a times may not be the case. That is;
Balance of payment disequilibrium
This occurs when there is either deficit or surplus in the balance of payments accounts. If there is surplus, then the country would like to maintain it because it is favourable, while if deficit, the country would like to correct it.
Causes of balance of payment disequilibrium
It may be caused by the following;
Correcting the balance of payment disequilibrium
The measures that may be taken to correct this may include;
Terms of sales in international trade
Here the cost trading which includes the cost of the product, cost of transporting, loading, shipping, insurance, warehousing and unloading may be expensive. This makes some of the cost to be borne by the exporter, as some being borne by the importer. The price of the goods quoted therefore at the exporters premises should clearly explain the part of the cost that he/she is going to bear and the ones that the importer will bear before receiving his/her goods. This is what is referred to as the terms of sale
Terms of sales therefore refers to the price quotation that state the expenses that are paid for by the exporter and those paid for by the importer.
Some of the common terms include;
INTRODUCTION & MEANING OF INTERNATIONAL TRADE
A trade involving the exchange of goods and services between two or more countries is referred to as international trade.
If the exchange is between two countries only, then it is referred to as bilateral trade, but if it is between more than two countries then it is referred to as multilateral trade.
Business Studies Notes Form 1 - 4
Atika School Team