CHAPTER ONE INTERNATIONAL TRADE AND THE BALANCE OF PAYMENTS Trade is simply a buying and selling of goods and services from one to other. International trade is a trade between residents of two countries. موقع المحاضرات. www.hims.edu.eg.
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INTERNATIONAL TRADE AND
THE BALANCE OF PAYMENTS
Trade is simply a buying and selling of goods and services from one to other.
International trade is a trade between residents of two countries.
Import is the purchase of goods and services from foreign countries leading to outflow of foreign currency.
Why do countries trade?
Without trade, A country must be self-sufficient. It must produce everything its citizens want to consume.
With trade, Countries can specialize in the production of goods that they can produce, and satisfy other needs by trading.
There are two classic international trade theories explained why the countries trade,
Adam Smith'stheory of absolute advantage
Ricardo's theoryof comparative advantage
explained the causes and gains from international trade.
Absolute advantage theory
Theory of absolute advantage demonstrates that:
international trade will be beneficial
One nation has an absolute advantage in one good and the other nation has an absolute advantage in the other goods
One country is said to have:
an absolute advantage when it can produce more of the good than another country, by the same quantity of resources.
It can be seen that:
The Egypt has an absolute advantage in clothes production,
as its workers' productivity in cloth is higher than that of the Japan.
Similarly, Japanhas an absolute advantage in cars production.
Each nation benefits by specializing in the production of goods that it produces at a lower cost than the other nation,
importing the goods that it produces at a higher cost.
Egypt has absolute advantage in both goods
Japan has disadvantage in both goods????
Egypt is six times as efficient in clothes production but only thrice as efficient in cars production
Egypt has a greater absolute advantage in clothes than in cars,
Japan has a smaller absolute disadvantage in cars than clothes
Each nation specializes in and exports that good in which it has a comparative advantage
Egypt in clothes, Japan in cars.
Trade enables both countries to have gain from trade.
balance of payments is defined as the record of transactions between residents and non-residents over a
Three main components :
The current account is subdivided into 4 sections
FOREIGN EXCHNGE MARKETS
AND EXCHANGE RATE
The foreign exchange market is the market in which individuals, firms, and banks buy and sell foreign currencies or foreign exchange.
The exchange rate between the dollar and the Egyptian pound is equal to the number of pounds needed to purchase one dollar.
For example, if 1$=6LE this means that six pound are required to purchase one dollar.
The exchange rate is determined, just like the price of any commodity, by the intersection of the market demand and supply curves for dollar