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International Trade - L.C.

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Mr. Garry .

on 27 April 2018

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Transcript of International Trade - L.C.

International Trade and Foreign Exchange
Outline the Advantages and Disadvantages of Trade for Ireland
Understand the difference between visible and invisible imports and exports
Explain Balance of Trade
Distinguish between Balance of Payments on Current, Capital and Financial Account
Understand the meaning of deficit/surplus on these accounts
Explain how to improve deficits or why some deficits mightn't matter (too much)

Explain and apply the Law of Absolute Advantage
Explain and apply the Law of Comparative Advantage
Explain the Limitations of the Law of Comparative Advantage
Outline Ireland's sources of Comparative Advantage and link to Specialisation and International Competitiveness
Evaluate Free Trade vs Protectionism (Tariffs, Quotas, Admin Barriers, and Trade Embargos)

Outline types of Exchange Rate
Explain the Exchange Rate Mechanism and Factors Affecting
Understand Appreciation/Depreciation/Revaluation/Devaluation of a currency
Explain the Importance of the EU and Implications of Brexit for Ireland (Hard border?)
Outline how European Monetary Union operates and its Advs/Disadvs
Success Criteria
Types of Trade
Discuss and list as many as you can think of
Why does Ireland Trade with other countries? Advs/Disadvs
Explain and apply the Law of Absolute Advantage
Explain and apply the Law of Comparative Advantage
Explain and apply Terms of Trade
Explain the Limitations of the Law of Comparative Advantage
Outline Ireland's sources of Comparative Advantage and link to Specialisation

Absolute and Comparative Advantage Success Criteria
Imports are goods and services produced in another country and sold to Irish consumers
Exports are goods and services produced in Ireland and sold abroad
Visible means the sale of physical goods
Invisible means the sale of services
Invisible doesn't mean trade by ninjas!!
Advs
Disadvs
Expanded market - Economies of Scale
Dependence on foreign markets (Susceptible to asymmetric shocks)
Greater choice
Access to imported raw materials
Leakages from circular flow
Greater competition for domestic firms
Outline types of Exchange Rate
Explain the Exchange Rate Mechanism and Factors Affecting
Understand Appreciation/Depreciation/Revaluation/Devaluation of a currency
Exchange Rates
Explain the Importance of the EU and Implications of Brexit for Ireland (Hard border?)
Evaluate Free Trade vs Protectionism (Tariffs, Quotas, Admin Barriers, and Trade Embargos)
Outline how European Monetary Union operates and its Advs/Disadvs
European Union and European Monetary Union
http://nationalgeographic.org/activity/the-trading-game/
We all love online shopping... List 5 reasons why you like to shop online

Was this one of them? http://www.economist.com/content/big-mac-index
Balance of Trade

Explain how to improve deficits or why some deficits mightn't matter (too much)
The Origami Challenge
http://www.origami-fun.com/origami-pelican.html
http://www.instructables.com/id/Make-a-rectangle-paper-to-a-square-paper/
Square sheet
http://www.origami-fun.com/origami-drinking-cup.html

Balance of Payments on Current Account
Trade in practice
Did any countries end the game richer or poorer than they started? Which ones?
What was it like to be a rich country? A poor country?
Was it easy or difficult to trade? Why?
Did any countries feel especially powerful or powerless?
Which items were most popular? Which were least popular? Why?
International Trade
{
{
{
Comparative and Absolute Advantage
Exchange Rates
The Pelicans
The Cups
states that each country should specialise in the production of that good which it can produce more efficiently/cheaply than other countries
The Law of Absolute Advantage
The Law of Comparative
states that a country should specialise in the production of those goods and services in which it is relatively most efficient and trade for the remainder of its requirements
Evaluate Free Trade vs Protectionism... Which do you think is better and why?



Tariffs
are a tax on imports
Quotas
are a limit on the amount of a product which is produced/imported
Administrative Barriers
are paperwork, bureaucracy and red tape which make trade more inconvenient
Trade Embargos
are a complete ban on trade with a country
Terms of Trade
refers to the ratio between the average price of exports and the average price of imports
What are Ireland's sources of comparative advantage?
How does Specialisation encourage International Trade?
What are the factors that affect Ireland's International Competitiveness?
Economic Benefits of Trade P429
is the difference between the visible exports and visible imports of a country
Injections
Employment
Lower Prices
Access to goods which our climate doesn't support or are t expensive to produce domestically
Who are Ireland's main trading partners?
http://www.worldstopexports.com/irelands-top-import-partners/
Research
is the difference between total exports and total imports. It has 3 sections goods, services and net factor incomes
Net Factor Incomes have been negative in Ireland for a long time due to repatriated profits of multinationals in Ireland. This decreases the value of the current account.
Balance of Payments on Capital Account
Balance of Payments on Financial Account
is a record of the receipts and payments for capital items. This includes EU capital funding and the acquisitions and disposals of non-financial assets e.g. patents and copyrights
deals with transactions in foreign financial assets and liabilities e.g. direct investment, portfolio investment, and other investments
Improvements
1
2
3
4
5
Which would you rather have, a current deficit or a capital deficit? Why?
Types of Exchange Rate:
Factors Affecting Exchange Rates
Benefits of the EU for Ireland
What is Brexit?
What are its Implications for Ireland?
Possible Effects of Brexit
Write a paragraph explaining what the Big Mac Index shows
Is this usually positive or negative for Ireland? Why?
2 Questions:
Is there a physical product?
Where is the money going?
Team 1
Team 2
1
1
2
2
3
3
Pelicans
Cups
Pelicans
Cups
Total:
Total:
Everyone write out which team should produce what and why
Protectionism are the efforts by a government to restrict free trade, especially imports.

Discuss and write down why a country would NOT want to trade with other countries
Fixed Exchange Rate: The value of the currencies are agreed upon between participating countries and doesn't change. It removes uncertainty and currency speculation but may be difficult to maintain




What does a clothes peg do?
https://www.boundless.com/economics/textbooks/boundless-economics-textbook/international-trade-31/introduction-to-international-trade-124/absolute-advantage-versus-comparative-advantage-493-12589/
http://www.economicsonline.co.uk/Global_economics/Comparative_advantage.html
Assumptions of Absolute Advantage:
2 Countries
2 Products
1 FOP: 2 units of Labour per country
No transport cost
Free mobility of FOPs

Plan for Easter
Exam papers
Absolute Advantage
After Specialisation
Country
Country
Country
Country
Ireland
France
Total output
Ireland
France
Total output
Ireland
Ireland
France
France
Total output
Total output
Comparative Advantage
After Specialisation
Potatoes
Potatoes
Potatoes
Potatoes
Strawberries
Strawberries
Strawberries
Strawberries
50
20
60
10
60
80
100
-
100
120
-
120
The two countries decide to put both workers into producing the good they can produce most efficiently and this increase total world output.
10
20
30
90
30
120
In this example France is twice as good at producing potatoes (20>10) and three times as good at producing strawberries (90>30).

Therefore they specialise production on what they are relatively better at: Strawberries
Ireland specialises production on what they are relatively better at: Potatoes

The total of potatoes falls. The total of strawberries increases. Total world output increases (150 - 200). 50% increase in strawberries. 33.3% decrease in potatoes. Thus the world is better off and the countries trade for what they need.
180
180
-
-
20
20
Both workers do it.
Country
Country
Clothing
Clothing
T.V.s
T.V.s
South Korea
China
South Korea
China
Total output
Total output
30
10
40
20
70
30
Terms of Trade
Value of one strawberry
Gives the value of one good in terms of another good
For Ireland 1 potato = 3 strawberries (30/10)
For terms of trade divide the chosen item by it's own quantity and divide the other item by the same quantity. This will tell you what one of the item is worth in terms of the other good according to that country. Repeat for the other country.
For France 1 potato = 4.5 strawberries (90/20)
Therefore the terms of trade of potatoes will be between 3 strawberries and 4.5 strawberries
Value of one potato
For Ireland 1 strawberry = 1/3 potatoes
For France 1 strawberry = 0.22 potatoes
Therefore the terms of trade of strawberries will be between 1/3 of a potato and 0.22 of a potato.
10/30
20/90
2008 Q 5
2017
– estimates suggest that if the UK leaves the EU, this could reduce bilateral trade flows between
Ireland and the UK by 20% or more //
– the impact would differ significantly across sectors, products and firm types, as the
merchandise / goods trade, in particular, is heavily concentrated in some sectors and products
and Irish firms are more dependent on the UK as an export market //
– the agrifood sector is particularly dependent on UK exports, and any increased trade barriers for
these products would have a more pronounced impact on trade volumes //
– the UK is more important as a source of imports to Ireland than as a destination for Irish
exports, and any trade barriers would increase the prices of UK imports to Ireland //
– the ‘Brexit’ vote led to an immediate drop in the value of the UK pound (sterling) against the
euro, from €1.31 to €1.16. A weak UK pound has negative effects for Irish exporters to the
UK. Currency fluctuations will make it more difficult for businesses to plan, as their costs and
selling prices may go up and down unpredictably //
– if the UK suffers a decline in economic growth due to the uncertainty following the vote, this
could further impact on Irish firms exporting to the UK //
– a weak UK pound makes many goods and services imported from the UK cheaper for
Irish consumers //
– however, if trade barriers are introduced, consumers will face higher prices for
UK imports //
– some UK companies, e.g. Unilever, have faced higher costs due to the weak UK pound because
they import raw materials from euro zone countries; they have increased the prices of some of
their products, which means they are more expensive for Irish consumers //
– it is possible that a reduction of FDI into the UK would result in an economic boost for Ireland
through additional FDI projects relocating from the UK //
– however, this anticipated gain may be small because Ireland’s attractiveness to FDI is already
high, relative to its economic size and geographical position. Larger EU member states, such as
Germany, France and Italy, may benefit more from the redirection of new FDI away from
the UK //
– a UK exit from the EU opens up the possibility of restrictions on the free movement of people
between Ireland and the UK for the purposes of work, including border controls with
Northern Ireland //
– as the UK remains an important destination for Irish emigrants, especially at times of high
unemployment, such restrictions could have implications for the Irish labour market //
– an all-island electricity market has existed since 2007, and interconnection between Ireland and
Northern Ireland is particularly important for Northern Ireland, which relies on electricity
imports from Ireland to make up for insufficient local electricity generation capacity //
– if the electricity market in the UK remains independent of the rest of the EU, interconnection
with the UK only would leave Ireland vulnerable to any problems in the UK market //
– if the UK leaves the EU, it will no longer be subject to EU rules on climate change policy and
renewables, which would reduce the chance that the UK would reopen discussions on trade
in renewables //
– the UK outside the EU would be less attractive to FDI because of its reduced access to the EU
Single Market. Less FDI is likely to result in slower economic growth in the UK, which would
impact negatively on Ireland’s economic growth //
– reduced economic growth due to decreased trade between Ireland and the UK would have a
negative effect on government tax revenue from corporation tax, income tax, etc. //
– if trade barriers are introduced between Ireland and the UK, the Irish government / government
agencies will have to spend more money legislating for these and helping affected companies,
e.g. Revenue Commissioners, Enterprise Ireland, IDA Ireland //
– if border controls are introduced between Ireland and the UK / Northern Ireland, these will
involve higher administration / policing costs for the Irish government //
– with the UK no longer contributing to the EU budget, the Irish government will have to
contribute more, reducing the revenue available for spending on public services, etc. //
– the UK has been a strong ally of Ireland in the EU since we joined together in 1973; if the UK
leaves the EU, the Irish government may experience more pressure from the other countries to
change our economic policies, e.g. our corporation tax rate // etc.
An exchange rate is the price of one currency in terms of another currency
e.g. The Saudi Arabian Riyal is pegged to the US Dollar. $1=3.75 Saudi Riyals (why?)

What is pegging?
Floating Exchange Rate: The value of the currencies fluctuate and equilibrium is determined through market demand and supply. There is more uncertainty, speculation and no government intervention.
Foreign Trade: If foreigners want to buy our goods/services their need our currency. This creates demand for the currency and increases its value. Vice versa
Interest Rates (Hot Money): The higher the interest rate the better the payoff for saving. If people want to save in Irish banks they must have the Euro. The higher the interest rate, the higher the demand for Euro, the higher its value will be.
Level of Money Supply: An increase in the money supply euro leads to increased spending on imports increasing the demand for foreign currencies and decreasing the value of the euro.
Central Bank Intervention: If a country wants to devalue its currency it can flood the market with supply. If it wants to revalue its currency it can use its foreign reserves to purchase their own currency. (Ireland can't do this...)
Speculators: These are people who purchase and sell currencies with a view to making a profit. They purchase a currency when it is weak and sell it after it appreciates.
Makes our currency stronger!!
Makes our goods more expensive in comparison to other countries
Increases imports
Decreases exports

Makes our currency weaker!!
Makes our goods cheaper in comparison to other countries
Decreases imports
Increases exports

Capital Funding
Safety
Freedom of Movement
Free Trade Area (Increased Market Size)
Foreign Direct Investment
Export Hub on the Doorstep of Europe
Britain's exit from the EU
https://www.forbes.com/sites/johnmauldin/2016/07/05/3-reasons-brits-voted-for-brexit/2/#3de3bff1672e
Why did it occur?
e.g.s ? issues?
Reduced Trade (20%?)
Customs Posts/Tariffs
Increased energy prices
Removal of Common Travel Area (restricted travel, passport control, hard-border)
Effects on Peace in NI
Uncertainty
Protect domestic employment
Prevent dumping
?
Protect indigenous firms/infant industry
Political reasons
Increase govt. revenue
https://www.tutor2u.net/economics/reference/protectionism
 Index of export prices   x 100
 Index of import prices
Country
Country
Clothing
Clothing
T.V.s
T.V.s
South Korea
China
South Korea
China
Total output
Total output
30
10
40
20
70
30
Practice
Revaluation is the increase in the value of a currency in terms of another caused by the government.
Appreciation is the increase in the value of a currency caused by changes in demand and supply for currency
Devaluation is the decrease in the value of a currency as controlled by the government.

Depreciation is the decrease in the value of a currency caused by changes in demand and supply for the currency
Research the strongest currency in the word
Research the weakest currency in the word
https://www.xe.com/currencyconverter/convert/?Amount=1&From=EUR&To=USD
https://www.boredpanda.com/corporation-economies-explained-cows-ecownomics/
Full transcript