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ECONOMICS Year 11

Chapter 18 International Trade & Exchange Rate

Malaysia Imports & Exports

IMPORTS

Exports

KEY THINGS TO CONSIDER IN INTERNATIONAL TRADE




 

 

WHY DO WE TRADE WITH OTHER COUNTRIES? WHAT DO WE EXPORT (SELL ) ABROAD)? WHAT DO WE IMPORT (BUY) FROM ABROAD? WHAT IS THE BALANCE OF PAYMENTS? WHY DO EXCHANGE RATES MATTER?

Exports are the movement of goods or commodities out of the country. It is represented by a flow of money back into the country as revenue Imports are the movement of goods or commodities into the country. Represented by a flow of money leaving the country

Exercise
  

 1. 2.

Exercise 1 Page 333 Students to break into a group of 6. 3 groups to discuss on Imports while the other 3 groups on Exports Data are then presented to the whole class on What goods & services we buy or sell Which countries are our biggest customers

Malaysia top biggest import and export market

Visible Trade


Visible trade involves trading of goods which can be seen, touched and weighed. Examples include trade in goods such as Oil, machinery, food, clothes etc.

Visible Trade consists of  Visible exports: Selling of tangible goods which can be touched and weighed to other countries.


Visible imports: Buying of tangible goods which can be touched and weighed from other countries.

Balance of trade


It is the difference between the value of visible exports and value of visible imports of a country. If the value of visible exports is more than visible imports the country will have a Surplus balance of trade. If the value of visible imports is more than visible exports the country will have an Unfavourable balance of trade or Deficit balance of trade

Balance of trade = Value of visible exports value of visible imports

Invisible trade


Invisible trade involves the import and export of services rather than goods. Example include services such as insurance, banking, tourism, education. If a UK student comes to Singapore to study, it would be invisible export for Singapore as it is earning foreign exchange by providing educational services. If a Singapore citizen travels to UK for a holiday. It will be invisible import for Singapore and invisible export for UK.

Balance of invisible trade It is the difference between the value of invisible exports and value of invisible imports of a country.

Do exercise 2 Page 335

Worlds top importers

WHY DO COUNTRIES TRADE WITH EACH OTHER?


  

To obtain goods that they cannot produce themselves To increase choice for their consumers To obtains goods at a cheaper price than what they can produce themselves To make more revenues and profits. It an extra place in which to sell their goods Countries specialise in the production of goods and services at which they are better. To exploit a comparative or absolute advantage.

COMPARATIVE ADVANTAGE


Where one country can produce a good at a relatively cheaper cost in terms of other goods than another producer. ABSOLUTE ADVANTAGE

Where one producer is better at producing a product than another producer.

UK AND COMPARATIVE ADVANTAGE




In recent years the UK had a comparative advantage in a number of manufacturing industries such as textiles or motorcycles. This was because the UK had lots of natural resources and raw materials, trained workers and lots of relevant machinery. However, now this advantage has been lost to other areas of the world particularly Asia. They have extremely cheap labour, new technology and low transport costs.

Balance of Payment
Meaning: A record of all transactions made between one particular country and all other countries during a specified period of time. BOP compares the dollar difference of the amount of exports and imports, including all financial exports and imports. A negative balance of payments means that more money is flowing out of the country than coming in, and vice versa

Balance of payments may be used as an indicator of economic and political stability. For example, if a country has a consistently positive BOP, this could mean that there is significant foreign investment within that country. It may also mean that the country does not export much of its currency. This is just another economic indicator of a country's relative value and, along with all other indicators, should be used with caution. The BOP includes the trade balance, foreign investments and investments by foreigners.

Balance of Payments
Remember: Remember: It shows all the payments and receipts between one country and all the other countries it trades with. Balance of Payment is classified into three categories. These are: 1. The Current Account 2. The Capital Account 3. The Financial Account

The current account


 

It includes All the visible and invisible trade of the country Wages received by countries citizens working outside in other countries or paid to foreign workers working in the country. Interest payments, profits and dividends on shares Taxes received and paid by the government from foreign sources.

The Capital account


It includes flow of money in and out of the country because of:
  

Change of ownership of fixed assets Sale of fixed assets $$ taken out of a country by residents leaving to stay abroad are debits while $$ brought in by migrants are credits

The financial account


It records the flow of money in and out of a country because of:
 

Investment in capital, shares and loans. Direct inward investment Ex. From foreign manufacturers eg xFab Portfolio investments eg purchase of shares from overseas investors

 

Balance of Payment can be favourable or unfavourable (deficit). The purpose of the balance of payments is to record of all financial dealings with foreigners CURRENT ACCOUNT The part of the balance of payments accounts where the value of exports and imports is recorded.

WHAT THE CURRENT ACCOUNT MIGHT LOOK LIKE UKs CURRENT ACCOUNT 2002(billion) 2002(billion)
VISIBLE EXPORTS VISIBLE IMPORTS BALANCE OF TRADE INVISIBLE EXPORTS INVISIBLE IMPORTS INVISIBLE BALANCE TOTAL EXPORTS TOTAL IMPORTS CURRENT BALANCE 700 800 - 100 300 100 + 200 1000 900 +100

In this case the UK is importing more goods (visibles) than it is exporting. However, it is exporting more services (invisibles) than it is importing. Overall, the positive invisible balance outweighs the negative balance of trade and the UK has a healthy, positive current balance.

WHY COULD THE UK HAVE A DEFICIT (-) ON ITS GOODS BALANCE? In this case the UK is importing more goods (visibles) than it is exporting. However, it is exporting more services (invisibles) than it is importing. Overall, the positive invisible balance outweighs the negative balance of trade and the UK has a healthy, positive current balance.

Exchange Rate


Exchange rate: - the price at which one currency is bought and sold for another e.g. 1 = $1.60380 UK and USA $1.60380 1 = 133.14 yen UK and Japan A 1 coin can be sold to buy $1.6 or 133 yen $1.6 In order to obtain a 1 coin an American would have to offer $1.6 and a Japanese person 133 yen. $1.6

1 0.626653 0.97661

1.5957 1 1.55845

1.02395

1.4066

1.02231

0.641661 0.38145 0.640635 1 1.37369 0.998401 1 137589 0.725797 1

0.710934 1.13449 0.727261


Tuesday, March 29, 2011

0.97817

1.56094

1.0016

Foreign Currency Units [=1 Malaysian ringgit] 1 Australian Dollar 1 Brunei Dollar 1 Canadian Dollar 100 Cambodian Riel 1 Chinese Renminbi 1 EURO 100 Hong Kong Dollar 100 Indonesian Rupiah 100 Japanese Yen 100 Korean Won 100 Phillippine Peso 100 Saudi Arabian Riyal 1 Singapore Dollar 1 Swiss Franc 100 Taiwanese New Dollar 100 Thai Baht 1 U.K. Pound 1 U.S. Dollar AUD BND CAD KHR CNY EUR HKD IDR JPY KRW PHP SAR SGD CHF TWD THB GBP USD Buying 3.1149 2.3953 3.1051 0.0747 0.4613 4.2659 38.8341 0.0347 3.6694 0.2729 6.9415 80.6916 2.398 3.2857 10.2628 9.9753 4.843 3.0265 Selling 3.1178 2.3979 3.109 0.0756 0.4617 4.2693 38.8623 0.0348 3.6727 0.2732 6.9621 80.7665 2.4005 3.289 10.3045 9.9983 4.8474 3.0285

CHANGES IN THE VALUE OF THE The value of the changes daily against other currencies. It could become stronger or it could become weaker
VALUE YESTERDAY 1 = $1.5 1 = $1.5 1 = 200 yen 1 = 200 yen VALUE TODAY 1 = $1.6 1 = $1.4 1 = 220 yen 1 = 180 yen EFFECT stronger or increased in value weaker or fallen in value stronger or increased in value weaker or fallen in value

WHY DO EXCHANGE RATES MATTER?


1. They influence the price of imports 2. They influence the price of exports 3. They effect tourism. s in exchange rates influence how much money you receive when you your currency 4. They can effect firms profits 5. They can have an effect upon unemployment, inflation, economic growth and the balance of payments.

ACTION a. How much currency did you receive on your last visit abroad? b. How did you work out the amount you would receive? c. How about when you changed it back into

Determines the exchange rate of a currency




Demand for a currency: People, firms & Governments buy the countrys currency to pay for their imports or to invest in the countrys companies Supply of the currency: Using the countrys currency to buy foreign currencies to pay for imports and overseas investment

WHAT HAPPENS WHEN THE CHANGES IN VALUE? EXAMPLE 1: EXPORTING (SELLING ABROAD)  SELLING A TABLE TO AMERICA. THE TABLE COSTS 100  YESTERDAY: 1 = $1.5  Cost to American 100 * 1.5 = $150  TODAY: 1 = $ 2 has got stronger  Cost to American 100 * 2 =$200 The strong has increased the price to foreigners. The UK business may struggle to sell the table TOMORROW 1 = $1 has got weaker Cost to American 100 * 1 = $100 The weak has reduced the cost to foreigners. The UK business should find it easier to sell the table In each of the above examples the UK firm still receives 100

    

CONCLUSION


A strong or an increase in the value of the makes it more difficult for exporters to sell their goods abroad. This is because foreigners have to pay more in order to buy our goods. The UK exporter could lower the price but then will lose some profit and may make a loss. Therefore a strong can cause problems for businesses which export in foreign markets. It could cause - unemployment - slower economic growth - a deficit on the balance of payments

EXAMPLE 2: IMPORTING (BUYING FROM ABROAD)


    

BUYING A TABLE FROM AMERICA. THE TABLE COSTS $100 YESTERDAY: 1 = $1.5 Cost to Britain $100 / 1.5 = 67 TODAY: 1 = $ 2 has got stronger Cost to Britain $100 / 2 =50 The strong has reduced the cost to UK importers. The UK people may be more likely to import the table.

   

TOMORROW: 1 = $1 has got weaker Cost to Britain $100 / 1 = 100 The weak has increased the cost to UK importers. The UK people are less likely to import the table. In each of the above examples the US firm still receives $100

CONCLUSION
 

A strong or an increase in the value of the makes it cheaper to import raw materials or goods from abroad. ? Good for businesses who need raw materials ? Bad for UK businesses who compete against foreign imports May reduce cost push inflation A weak or a fall in the value of the makes it more expensive to import raw materials or other goods from abroad. - Bad for businesses who import raw materials - Good for UK businesses who compete against foreign imports May cause cost push inflation

FIXED EXCHANGE RATE SYSTEM  An exchange rate that is kept within a certain value. It is prevented from changing too much  e.g. the may have to stay within a certain value against the $  1 = no less than $1.4 but no more than $1.6  WHY? ? Avoid wide ranging changes in the value of the ? Firms can plan ahead with confidence ? Exporters shouldnt suffer too much ? Should encourage trade

HOW DOES IT WORK? WORK?


If the is falling in value then the Government will intervene and buy from foreign countries this will increase the value of the  If the is increasing in value then the Government will intervene and sell at a lower price to foreign countries the will fall in value A movable or adjustable peg system is a system of fixed exchange rates, but with a provision for the devaluation of a currency. For example, between 1994 and 2005, the Chinese yuan renminbi (RMB) was pegged to the United States dollar at RMB 8.2768 to $1

In 1998 Tun Dr Mahathir Mohamad has proposed that the ringgit should once again be pegged against the US dollar to deal with the current economic uncertainties. The former prime minister said it would be difficult for the country to plan its economy with a fluctuating exchange rate. "The government should consider taking control of the currency by pegging the ringgit against the US dollar," he said after attending a seminar on developing strategic planning for higher education here yesterday.

The Reasons


Between 1995 and 1997, the ringgit was trading as a free float currency at around 2.50 to the U.S. dollar, before dipping to dollar, under 3.80 to the dollar by the end of 1997,following the year's East Asian financial crisis. crisis. For the first half of 1998, the currency fluctuated between 3.80 and 4.40 to the dollar,before Bank Negara Malaysia pegged the ringgit to the US dollar in September 1998, maintaining its 3.80 to the dollar value for almost seven years, while remaining floated against other currencies. The ringgit lost 50% of its value against the US dollar between 1997 and 1998, and suffered general depreciation against other currencies between December 2001 and January 2005. As of September 4, 2008, the ringgit has yet to regain its value circa 2001 against the Singapore dollar (SGD) (2.07 to 2.40 to the MYR),the Euro (EUR) (3.40 to 4.97 to the MYR), the Australian dollar (AUD) (1.98 to 2.80 to the MYR, and the British pound (GBP) (5.42 to 6.10 to the MYR.

FLOATING EXCHANGE RATE


The can change in value freely against the $. It could end up at any exchange rate. the government will not intervene to influence its rate. A FALL IN THE VALUE OF THE This could happen in 2 ways  a) DEVALUATION  This is when the government deliberately engineers a fall in the . It may do this by selling at lower prices in order to reduce their value. It might do this to make UK firms more competitive.  b) DEPRECIATION  This is when the falls naturally to a lower level. There is no influence from the government. ACTION  Why might a government want to have a lower exchange rate?

What factors determine the foreign exchange rate of a currency


1) Trade (exports/imports) 2) Interest Rates - increasing the interest rate causes 'hot' money to flow into the economy, therefore the demand the domestic currency increases, therefore the currency appreciates. 3) Inflation - relative inflation rates affects the economy's international competitiveness , so if the economy is experiencing higher inflation rate than its trading partners to such a situation that it is less competitive than they are, than there shall be less demand for the domestic currency as foreign markets will demand less goods and services from you, hence the demand for the domestic currency shall drop.

4) Speculation - simply a believe in the path the currency, shall cause speculators to adjust their trades in light of this believe. e.g. if currency speculators believe that an economy is overheating and soon there shall be a devaluation, then they will get out of the currency causing there to be more supply than demand on the forex for that currency, hence it depreciates.

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