Global Context

International Trade - the exchange of goods and services across international borders.

International Trade over time

Since WW2 international trade has grown massivale. The increase in trade blocs has lead to easier freeer trade with little to know barriers to trade. The industrialisation of countries like China and India has complimented the deindustrialisation of countries like the UK to offer their produce to the wester countries.

Comparative Advantage

This is a theory which says that countries should produce the goods which they can most efficiently or with the least opportunity cost. Countries should focus on producing the goods which have the least opportunity cos and then buy other products from elsewhere. This is true even if they have absolute advantage on a number of goods.

Advantages

• Greater world output and increased global economic welfare
• Increased competition so higher quality products and increased variety
• Outward shift of PPF
• Lower average costs
• Increased opportunities for economies of scale

Disadvantages

• Less developed countries may use up their resources more quickly to try and keep up with the world production levels
• Countries could become overdependent on the revenue of ONE export. For example, crops. the weather could affect this and damage a countries economy
• Structural unemployment as production moves abroad

Exchange rates - the cost of one currency in comparison to another.

Nominal exchane rate - The value of one currency in comparison to another without adjusting for inflation.

Real exchange rate - The value of one currency in comparison to another whilst adjusting for inflation and giving a more accurate represntation of purchasing power. 

Floating exchange rate: determined by the marekt forces of supply and demand.

Fixed exchange rate: A value determined by the government in comparison to other countries.

Depreciation - When the value of a currency falls in relation to that of another currency, especially in a floating exchange rate system.

Appreciation - When the value of a currency rises in relation to that of another currency. For example, being able to buy more dollars (USD) for a pound (GBP).

Devaluation - When the value of a currency is officially lowered in a fixed exchange rate system.

Revaluation - When the currency's value is adjusted relative to a baseline, such as the value of gold or wage rates.

Inflation rates - High inflation rates tend to devalue a currency as its purchasing power becomes weaker. This forces a currency to depreciate.

Interest rates - High interest rates provide higher return on investments. This encourages people from other countries to invest in a currency. This causes an appreciation in the exchange rate.

Speculation - If people think a currency will appreciate in the future. They will demand it now.

Government finances - A govenment with lots of debt is at risk of defaulting and the currecny depreciating. Investors will lose confidence and sell theiur bonds, depreciating the currency.

Balance of Payments - when imports exceed exports there is a current account deficit. If they cannot attract capital inflows, their currency is likely to depreciate.

Government intervention - Countries can also buy and sell their own and other currencies in order to manage the axchange rate. For example, china has previously bought lots of USD in order to make their exports seem cheaper

Marshall Lerner condition states that a devaluation of currency actually just helps to fix the Balance of trade in the long run.

The J-curve shows how devaluing a currency will initially increase a current account deficit. After that the exports will increase and current account deficit will close. The graph goes down first because there is time lags on the devaluation of a currency. This could be due to things like sales contracts and inelastic trade products.

Aggregate Demand

If exchange rates appreciate then imports become cheaper and exports more expensive. This decreases AD. 

Exchange rates - Strong Pound Imports Cheap Exports Dear

Fixed Exchange Rates

Advantages

Disadvantages

Firms can plan investments in advance without worry of sudden fluctuations in exchange rate

The Government does not necessarily know the best place for the currency, better than the market

Monetary policy can have a focussed target to work towards

Balance of Payments does not automatically adjust to economic shocks

Costly and time consuming to have large foreign currency reserves.

Advantages

Disadvantages

The exchange rate automatically adjusts to economic shocks

Difficult to plan investment as the fluctuation in the price is unpredictable 

It gives monetary policy more freedom to focus on other macroeconomic objectives

Can also affect come imports and exports of a country which can cause a lot of unemployment in certain industries

Globalisation- The increasing interconnectedness and integration of the worlds economies into one, international economy.

• Huge increase in developing countries selling services to developed countries (tourism, call centres etc)
• Growth in free trade organisations like the World Trade Organisation
• Growth in Multinational corporations that trade across borders and spread knowledge globally
• Communcations and IT mean that global trade can be easily organised using online systems
• Containerisation is a method used to maximise the amount of product that can be globally shipped.