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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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CHAPTER ONE INTERNATIONAL TRADE AND THE BALANCE OF PAYMENTS

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Chapter one international trade and the balance of payments

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.


Chapter one international trade and the balance of payments

موقع المحاضرات

www.hims.edu.eg


Chapter one international trade and the balance of payments

Import is the purchase of goods and services from foreign countries leading to outflow of foreign currency.

  • Export is the sale of goods and services to foreign countries leading to inflow of foreign currencies.


Chapter one international trade and the balance of payments

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.


Chapter one international trade and the balance of payments

There are two classic international trade theories explained why the countries trade,

Adam Smith'stheory of absolute advantage

Ricardo's theoryof comparative advantage

Which

explained the causes and gains from international trade.


Chapter one international trade and the balance of payments

Absolute advantage theory

Theory of absolute advantage demonstrates that:

international trade will be beneficial

when

One nation has an absolute advantage in one good and the other nation has an absolute advantage in the other goods


Chapter one international trade and the balance of payments

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.


Chapter one international trade and the balance of payments

Assumptions:

  • There are two countries in the world

  • Labor is only one factor of production

  • The cost of a good depends on the amount of labor

  • No transportation cost exists.


Chapter one international trade and the balance of payments

Example


Chapter one international trade and the balance of payments

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.


Principle of absolute advantage

Principle of Absolute Advantage

Each nation benefits by specializing in the production of goods that it produces at a lower cost than the other nation,

while

importing the goods that it produces at a higher cost.


Comparative advantage theories

Comparative advantage theories

What If

Egypt has absolute advantage in both goods

While

Japan has disadvantage in both goods????


Chapter one international trade and the balance of payments

Example

3times

6times

1

2


Chapter one international trade and the balance of payments

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,

while

Japan has a smaller absolute disadvantage in cars than clothes


Chapter one international trade and the balance of payments

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.


Chapter one international trade and the balance of payments

  • Define the advantage and specialization in the next case:

  • Case 1

  • Egypt has................ In producing and exporting………………….While Japan has…………………in producing and exporting……………………


Balance of payments

Balance of Payments

balance of payments is defined as the record of transactions between residents and non-residents over a

specified period.

Three main components :

  • The current account,

  • The capital account

  • The official statements b


Chapter one international trade and the balance of payments

  • The Current Account (CA);

    The current account is subdivided into 4 sections

  • The merchandise trade account (Exports or imports of goods.),

  • Theservices account ( tourists’ expenditures, and shipping fees)

  • investmentincome account (International interest and dividend payments and the earnings of domestically owned firms operating abroad).

  • the transfer payments account (unilateral current transfers (like gifts and foreign aids).


Chapter one international trade and the balance of payments

  • The Capital Account:

  • The Capital Account includes the purchase and sale of financial and non-financial assets.

  • The Official Account:

  • Includes the net change in foreign exchange reserves and official government borrowing.


Chapter one international trade and the balance of payments

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 foreign exchange market for any currencyis composed of all the locations (such as London, Paris, Zurich, Frankfurt, Singapore) where currencies are bought and sold for other currencies.


Exchange rate

Exchange Rate

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.


Equilibrium foreign exchange rates

EQUILIBRIUM FOREIGN EXCHANGE RATES

The exchange rate is determined, just like the price of any commodity, by the intersection of the market demand and supply curves for dollar


Chapter one international trade and the balance of payments

D

7

6

5

D

300

100

200

Imports

S

Exports

Surplus

E

Deficit


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