CHAPTER 13

CHAPTER 13

1. TRADE

   • WHAT?
     • International trade is the exchange of goods & services between countries. An import to Singapore is the Singapore purchase of a good or service made overseas. An export from Singapore is the sale of a Singapore-made good or service overseas.
     • It refers to themovement of goods and services and excludes the capital and labour movements.
   • WHY?
     • SUPPLY REASONS
       • Differences in Factor Endowments and Technological Capabilities
       • International Immobility of Factors Of Production
       • Differences in Factor Proportions
       • Desire to Reap Internal Economies Of Scale
       • Desire to Reap External Economies Of Scale
     • DEMAND REASONS
       • Product Differentiation (Variety and Consumer Welfare)
       • Differences in tastes
       • Stage of Economic Development
   • TERMS OF TRADE (TOT)
     • Terms of trade measures the rate of exchange of one good or service for another when two countries trade with each other. It is the ratio of the index of export prices to the index of import prices. Terms of Trade Index = (Export price index (PX) x 100) / (Import price index (PM))
     • FACTORS AFFECTING
       • A fall in demand for a country’s exports and hence the price of exports (PX).
       • An increase in the supply of major exports which results in a fall in their price (PX).
   • FOREIGN EXCHANGE RATE
     • Foreign exchange refers to the trading of one country’s currency for another (foreign) currency.

2. BALANCE OF PAYMENTS

   • WHAT?
     • The Balance of Payments is a comprehensive record of international receipts and international payments between the residents & government of a country and the rest of the world over a period of time usually a calendar year. It uses the double entry accounting system.
     • Credits are receipts of money from abroad and are entered in the accounts with a positive sign
     • Debits are payments of money abroad and are entered in the accounts with a negative sign
   • EFFECTS
     • ON
       • Domestic income level
       • Income levels in export destinations
       • Country's stage of development
       • Long-term investment prospects
       • Rate of interest
       • Changes in the prices of imports and exports (TOT)
       • Expected changes in the country's currency exchange rate
       • Government Policy
     • OF
       • DEFICIT
         • Short term boost in living standards
         • Reduces the country's gold and foreign exchange reserves
         • Undermine government’s ability to influence its exchange rate
       • SURPLUS
         • Increased foreign exchange reserves
         • Increased Money supply
         • Increased income
         • Possibility of inflation
   • ACCOUNTS
     • CURRENT
       • Records receipts from the export of goods and services as well as payments made for the import of goods and services during the current period
         • Visible Trade accounts(BoT)
         • Invisible Trade(Services)
         • Unilateral Transfers
         • Income flows - Interest, profits & dividends
     • CAPITAL & FINANCIAL
       • Records the flow of funds into the country and out of the country for investments and is associated with changes in ownership of assets e.g. land and the purchase and sale of foreign securities.
         • LONG TERM
           • includes Foreign Direct Investments and Portfolio Investments
         • SHORT TERM
           • involve liquid funds moving among financial centres searching for higher interest rates and safety of capital.
     • BALANCING ITEM
       • A make up for the difference between the total value of recorded transactions and the precise account kept by the relevant authorities i.e. the central bank.
     • OFFICIAL FINANCING
       • BOP Deficit- Credit account
       • BOP Surplus- Debit account
     • OVERALL BALANCE - TOTAL CURRENCY FLOW