INTERNATIONAL ASPECTS

GLOBALIZATION
It may be defined as the process by which businesses or other organisations develop international
influence or start operating on an international scale.
Globalization is the process of interaction and integration between people, companies and govt
worldwide. It has grown due to advances in transportation and communication technology.
It is a wide term used to describe economic, social, technological, cultural and political changes
that are increasing interdependence and interaction between people, firms and entire economies
across the globe.
Economic aspects of globalization :
 Increasing reliance of economies on each other through international trade for an
increasing variety of goods and services
 Opportunities for firms to trade in any country
 Increasing opportunities for capital and labour mobility
 Growth of global financial markets
 Impact of all these changes on allocation of resources, balance of payments of countries,
economic growth and living standards
Rapid globalization is the result of :
 Increasing wealth
 Development of new technologies
 Faster and cheaper communication( internet)
 Transition of many former planned economies to free market economies
 Reduced barrier to international trade (allowing free mobility of people and finance)

INTERNATIONAL SPECIALISATION
Specialization allows people and countries to become more productive by enabling them to
produce those goods and services they are best able to. This allows economies to produce more
efficiently with their scarce resources.
Regional specialization :
Countries and regions concentrate on producing goods and services they are best at rather than
wasting resources on products that they make less efficiently.
How does specialization occur:
 Countries specialize in lines where they have superior factor endowments
 Natural resources eg. Ghana – cocoa (geographical factors), eg. Oil reserves
 Human resources eg. Japan – technology (human effort, training)
  By trading, countries may be able to acquire certain goods more cheaply than they can
produce them domestically
Advantages of specialization:
1. Enables increased output
2. Consumers have access to greater variety of higher quality products from across the
world
3. Increased size of the market, enabling economies of scale
4. Greater efficiency
Disadvantages of specialization:
1. Country may become vulnerable if it has to rely on imports to meet its needs
2. A country may be vulnerable if specialized products it makes can be replaced (eg. by
advancements in technology)
3. Too much specialization can lead to inflexibility
4. Country becomes vulnerable to exchange rate fluctuations
Comparative advantage:
Benefits of specialization and trade can be explained by the economic theory of comparative
advantage.
 Absolute advantage : a country is able to produce a good at a lower average cost per unit
than others.
 Relative/comparative advantage : a country has a comparative advantage over others in
producing a particular good if they can produce that good at a lower relative opportunity
cost.

THE BALANCE OF PAYMENTS

The balance of payments (BoP), of a country is the record of all economic transactions between
the residents of the country and the rest of world in a particular period of time. The balance of
payments is a summary of all monetary transactions between a country and rest of the world.
These transactions are made by individuals, firms and government bodies. Thus the balance of
payments includes all external visible and non-visible transactions of a country.
BoP is split into two main accounts:
1. The current account : it records
a. Visible trade in goods
b. Invisible trade in services
c. Income flows (income received or paid – salaries, profits on investment)
 d. Current transfers (transfers of money that is not part of a trading process - gifts,
aids, donations)
2. The capital account (or the capital and financial account) : The capital account is a record
of the inflows and outflows of capital that directly affect a nation’s foreign assets and
liabilities.
It records international capital transfers for the acquisition, disposal or transfer of
non-financial assets like land, factories, office buildings, machinery, between its
residents and the rest of the world.
The components of the capital account include foreign investment and loans,
banking capital and other forms of capital, as well as monetary movements or
changes in the foreign exchange reserve.
Debits in BoP represent payments and credits represent receipts.
The BoP of a country will always balance, such that total credits will exactly match total debits.
If there is a current account deficit it should always be balanced against a combined surplus on
the capital and financial accounts. And vice versa.

EXCHANGE RATES
It is the amount at which one country’s currency can be brought (or exchanged) with another’s.
The exchange rate between two countries is determined by the demand and supply factors. The
equilibrium market price of one national currency in terms of another is its exchange rate.
Foreign exchange market (or Forex market) : It consists of all people, organisations and
governments who are willing and able to buy or sell international currencies.
Multiple exchange rates : eg. SGD/USD, SGD/INR, SGD/Peso etc.
Exchange rate systems:
1. Fixed exchange rates :
 The value of the currency is fixed against another currency or group of currencies
 This fixed rate is maintained by the govt
 In this system, a govt, or the central bank acting o the Govt’s behalf will intervene
in the forex market so that value of currency remained the same
 Intervention is in the form of buying up its currency when value is falling and
increasing supply of currency (by selling off reserves) when value is rising
2. Floating exchange rates :
 It is determined freely by market forces
 It keeps fluctuating
 Increase in demand for currency leads to its appreciation (Dia.)
 Decrease in demand for currency leads to its depreciation
Changes in exchange rates affect the prices of imports and exports. (Examples)
Reasons for changes in value of exchange rate (under floating) :
1. Changes in the current account balance
2. Inflation
3. Changes in interest rates
4. Speculation

Revaluation of currency :
Revaluation of currency occurs when its value is adjusted. In a fixed exchange rate system,
currency may become overvalued over time. (Exporters find it difficult to export). Govt may
then have to act and devalue the currency.

CORRECTING A TRADE IMBALANCE

The current account position of most countries is dependent on their balance of trade. Large trade
imbalances (whether its deficit or surplus) can cause problems for a national economy.
Problems with a trade deficit :
 A growing trade deficit may be a sign of economic expansion or recovery in an economy
(as people and firms increase their spending)
 But a large and growing trade deficit may be a signal of slow or negative economic
growth and a declining industrial base (fewer firms able to produce goods for exports or
even for own consumption)
Economic problems of trade deficit:
1. More money paid for imports than what is earned on exports means less is available for
consumers to spend on domestic goods and services. It will lead to - Fall in demand for
domestic products resulting in fall in production and employment.
2. Value of exchange rate will fall, imports will become expensive leading to imported
inflation. If demand for imported goods is inelastic, spending on imported goods will rise
at the expense of domestic goods.
3. To pay for annual deficits, country may need to borrow leading total debt to rise. With
rising interest charge, more money flows out of country. Less money available for
domestic investment. This will harm economic growth.
Alternatives available to Govt to manage trade deficit :
1. Do nothing, because a floating exchange rate should correct it
2. Use contractionary fiscal policy
3. Raise interest rates
4. Introduce trade barriers
Problems with trade surplus : Having a large and persistent trade surplus can cause problems for
the economy.
1. There may be political and economic pressure on the Govt from other countries
2. Increase in income from exports may cause demand-push inflation
3. Value of currency will rise (it will increase the price of exports, demand will fall, jobs
will be lost)
To correct a damaging trade surplus, Govt may :
1. Do nothing, because a floating exchange rate should correct it
2. Use expansionary fiscal policy
3. Lower interest rates
4. Remove any trade barriers

INTERNATIONAL TRADE :
It involves the movement and exchange of physical goods as well as services, ideas, money and
labour across international borders.
Changing trade patterns :
 Earlier international trade was dominated by trade of raw materials
 International trade is growing rapidly as more economies develop and incomes around
the world rise
 In 1963 value of global trade was $160 billion, in 2008 it was $ 16.1 trillion
 In 2009, China was the largest exporter
 Trade in services has increased rapidly
Open economy : An economy that engages freely in trade with other economies.
 It trades in more goods, services and capital investments
 Their firms face more international competition
Structural change in global economy:
 Many economies became open (India, China, Brazil)
 Business expanded in developing economies
 Wages and salaries still relatively low in developing economies, enabling firms there to
have competitive edge in terms of cost
 Human resources and technology fast developing in developing countries
 Rising income in developing economies is increasing spending power of their consumers
 MNCs moving to developing countries to take advantage of low cost labour and vast
market
  MNCs threaten existence of local producers in developing countries
 Jobs are lost in developed countries
Globalization is hence creating economic conflict. Eg. Brexit, US change of policies

METHODS OF PROTECTION :
Trade protection is restricting the entry of foreign goods into a domestic market, or imposing a
tax to raise the price of imports.
Types of trade protection :
1. Import tariffs – Taxes on certain imports or on imports from certain countries (eg. US
imposing tariffs on China products)
2. Import quotas – Setting a physical limit (restricting quantities)
3. Import Licensing
4. Administrative complexity (time consuming paperwork)
5. Subsidies – To domestic producers to reduce their costs and make domestic goods
cheaper (eg. US farm subsidies)
6. Exchange control – Limiting the amount of foreign exchange for importers
7. Exchange rate manipulation
8. Embargo – Complete ban
Arguments for trade barriers : (Same as reasons for protection) given below

THE MERITS OF FREE TRADE :

Free Trade : It is trading without hindrance or barriers.
Benefits of free trade:
1. Comparative advantage
2. Specialization
3. Producer able to sell to those willing to pay highest price
4. Increases the range of products available
5. Consumer gets better quality
6. New job opportunities
7. Spread of new ideas, lifestyles, etc
8. Enables firms to benefit from the best workforces, resources and technologies from
anywhere in the world
9. International trade increases economic interdependency and hence reduces the potential
for conflict
Disadvantages of Uncontrolled trade:
 1. International trade with low-cost economies is threatening jobs in many developed
economies and reducing opportunities for growth in less-developed economies
2. International trade is contributing to rapid resource depletion and climate change
3. International trade may increase the exploitation of workers and the environment
4. It may be increasing the gap between rich and poor countries
World Trade Organisation :
 Set up in 1995
 Purpose to open up trade for the benefit of all
 Trade ministers of different countries meet to make agreements and settle trading
disputes
Main principles of WTO:
1. To pursue open borders (free trade)
2. Most Favoured Nation principle

MERITS OF PROTECTION
Reasons for protection:
1. To help infant industries
2. To protect sunset industries (declining industries)
3. To protect small industries important to small economies
4. To protect local jobs against cheap imports from large countries
5. To protect the current account of the balance of payments
6. To protect domestic industries from cheap subsidized imports
7. To protect strategic industries
8. To encourage green and environmentally friendly technologies
9. To protect intellectual property rights (IPR)
10. To protect domestic firms from dumping
11. To limit over-specialisation
12. Because other countries use trade barriers
Arguments against trade barriers :
1. They restrict consumer choice
2. They restrict new revenue and employment opportunities
3. They protect inefficient domestic firms
4. Other countries may retaliate
Protectionism : It is the economic policy of restricting imports from other countries through
methods such as tariffs on imported goods, import quotas, and a variety of other government
regulations.