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The Foreign Sector

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Bachelors Degree Understanding Macroeconomics Philip Mohr Institute of Marketing Management Mind Map on The Foreign Sector, created by Robyn Oelofse on 19/10/2015.
Robyn Oelofse
Mind Map by Robyn Oelofse, updated more than 1 year ago
Robyn Oelofse
Created by Robyn Oelofse about 10 years ago
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Resource summary

The Foreign Sector
  1. successful economies compete internationally
    1. globalisation
      1. factors of production are more mobile
        1. countries effect each other
          1. extent of involvement known as 'openess'
            1. aka 'integration'
        2. imports, exports, capital movements
          1. GATT reduced trade tariffs
            1. later Marrakesh Agreement addressed other unresolved issues
              1. post WWII: World Bank and International Monetary Fund
                1. IMF provides loans to 29 members
                  1. IMF conditionality
                  2. only developing countries can borrow from World Bank
              2. Why countries trade
                1. self-sufficiency not viable
                  1. specialise
                    1. interdependent
                  2. factors of production not available
                    1. Absolute advantage
                      1. when a country can produce a product more efficiently
                      2. Comparitive (aka relative) advantage
                        1. opportunity cost of production differs
                          1. each country shifts limited resources to produce that which it produces most efficiently
                            1. these decisions taken by firms as a reaction to the market
                        2. need incentives to trade
                          1. mutually beneficial comparative advantage
                        3. Trade Policies
                          1. Import tariffs
                            1. believed to protect domestic products (not the case)
                            2. Import quotas
                              1. physical level of imports controlled. Same lack of effect as tariffs.
                              2. subsidies
                                1. granted to domestic firms. Lack effect.
                                2. non-tariff barriers
                                  1. beucratic limits ie red tape
                                  2. exchange controls
                                    1. limit foreign currency available to use to purchase
                                    2. exchange rate policy
                                      1. probably most effective
                                    3. Exchange rates
                                      1. foreign trade requires foreign currency
                                        1. imports create a demand for currency, and exports create a supply of currency
                                          1. this exchange called 'foreign exchange rate'
                                            1. ratio: price of one currency in relation to another
                                              1. appreciation in one currency = depreciation in another
                                              2. foreign exchange market
                                                1. determines exchange rate
                                                  1. no fixed location
                                                    1. includes banks and authorized currency dealers
                                                  2. the cheaper the foreign currency, the more goods can be imported and more dollars needed and vice versa
                                                    1. equilibrium: supply and demand are equal
                                                      1. change in supply and demand results in change in exchange rate
                                                        1. dampens and stimulates imports and exports
                                                          1. as reflected on current account
                                                            1. affects inflation and export competitiveness
                                                    2. sources of demand for currency
                                                      1. importers
                                                        1. tourism abroad
                                                          1. buyers of foreign assets eg shares
                                                            1. foreign sellers of SA assets
                                                              1. speculators
                                                                1. exchange rate affected by predictions of fluctuations - self fullfilling immediately
                                                              2. suppliers of foreign currency
                                                                1. exporters
                                                                  1. foreign purchasers of SA assets
                                                                    1. SA sellers of foreign assets
                                                                      1. speculators
                                                                        1. local tourism
                                                                      2. intervention in the foreign exchange market
                                                                        1. seek to control fluctuations and pursue policy objectives
                                                                          1. managed floating
                                                                            1. will add currency to the market at original exchange rate to reduce inflation (ie depreciation)
                                                                              1. can do only if has sufficient funds, so not really viable anymore
                                                                          2. central banks

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