Chapter (11)
International trade and exchange rates
11.1 International Trade
1. International trade benefits the world. It creates opportunities for business growth ,
increase competition and provides more consumer choice.
Allow countries to obtain goods that cannot be produced domestically
Allows countries to obtain goods that can be bought more cheaply from overseas
Helps to improve consumer choice
Provides opportunities for countries to sell off surplus commodities.
2. Goods and services sold overseas are called exports. Those bought from other countries
are called imports.
Visible trade involves trade in physical goods. For example, India sells textiles, leather
goods overseas. These are visible export for India.
The difference between total visible exports and imports is called the visible balance or
the balance of trade.
Invisible trade involves trade in services. A service could be something like banking,
insurance, tourism etc. More and more countries encourage free trade-they don’t restrict
imports.
3. The main benefits of free trade are
More consumer choice: it can get products that are made more cheaply
elsewhere
Growth: domestic markets may become saturated so by selling overseas they can
generate more sales
Competition: it will increase because most countries import goods that they can
also produce.
Less risk: if one market is not doing well due to poor economic environment
companies can focus in growing markets.
4. International trade involves financial transactions in different national countries.
Business involved in international trade must exchange different national currencies and
need to be aware of how changes in exchange rates can affect them.
5. Foreign exchange market. The global market for buying and selling national
currencies. The market determines the price or rate at which one currency can be
exchanged for another national currency.
11.2 WHAT IS AN EXANGE RATE?
When countries use different currencies , transactions between people and firms in
different countries are affected.
Exchange rate. The market price or value of a national currency in terms of another
currency.
International competitiveness. How the prices of items traded internationally compare.
For example, an increase in the prices of imported goods will make them relatively less
competitive than the same goods produced by domestic firms in the importing country.
11.3
Example (1) : A French firm buys goods from a British firm which cost GPB 400,000. If
GPB 1= Euro 1.10, how much will the cost be to the French firm in Euros?
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Example (2): How many US dollars will be needed by a British firm buying GBP 55,000
of goods from an American Firm if the exchange rate is GBP1 = US $1.50?
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The impact of changes in the exchange rate on importers and exporters
Example(3): How much will it cost a British firm in pounds to buy $300,000 of goods
from a US firm is GBP 1= US 1.5?
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Exchange rates influence the price of imports and exports. A change in the value of
one currency will affect a business in terms of sales, costs, and profits.
Can have an impact on the demand for exports and imports
Exchange rates changes the prices of exports and imports change
Currency Appreciation. A rise in the value or market price of a national currency
against another currency or currencies.
The appreciation of a currency means it worth more, relative to another currency. For
example , if the euro rises from €1=$1 to €1=$ 1.5. The effect of this is to:
rise the price of exports, for example, exports from Europe sell for a higher price
in America as it takes more dollars to buy each euro. People in America have to
spend more dollars buying euros to buy same account of exports from Europe.
Import prices fall and demand for them might rise, for example, imports into
Europe now cost less to buy from America, as fewer euros have to be given to
buy the dollars needed for the same amount of imports.
Currency Depreciation . A fall in the value or market price of a national currency
against another currency or currencies.
The depreciation of a currency means it worth less ,relative to another currency. For
example , if the euro rises from €1=$ 1.5. to €1=$1.The effect of this is to
Make exports cheaper, for example, exports from Europe sell for a lower price in
America as it takes fewer dollars to buy each euro. People in America have to
spend as many dollars buying euros to buy exports from Europe.
Import prices are expensive and demand for them might fall, for example,
imports into Europe now cost more to buy from America, as more euros have to
be given to buy the dollars needed for the same amount of imports.
The impact of changes in the exchange rate on importers and exporters
Currency appreciation Currency depreciation
(exchange rate rise) (exchange rate fall)
Importer Imports cheaper Imports more expensive
Prices Prices
Demand Demand
Sales Sales
Profits Profits
Exporter Exports more expensive Exports cheaper
Prices Prices
Demand Demand
Sales Sales
Profits Profits
A currency might depreciate for these reasons A currency might appreciate for these reasons
The country buys more imports than it exports. The country sells more exports than it
To do so it must sell its currency to buy other imports . Overseas consumers must sell
currencies. their currencies to buy exports from that
country.
Interest rates fall relative to those in other Interest rates rise relative to those in other
countries so people move their savings to banks countries. This attracts savings from
overseas. overseas residents.
inflating rises relative to inflation in other Inflation is lower than in other countries so
countries. This makes exports more expensive. exports will become more competitive.
Overseas demand for them, and the currency Overseas demand for them, and the
needed to buy them, will fall. currency required to pay for them, will rise.
people and business speculate their national People and businesses speculate their
currency will fall in value and sell their holdings national currency will rise in value and buy
of the currency. more of the currency.
11.4 International competitiveness and exchange rates
Sometimes these changes will benefit a business , other times they will not.
Sustained changes in the exchange rates can have an impact on the international
competitiveness of a country
If the exchange rates falls sharply for a long period of time ,all exporter can sell their
goods more cheaply impact on the country economy
Higher export sales mean more employment, income and tax revenue for the
country.
Lower exchange rate means that the import prices are rise.
This means that consumers will have to pay more for overseas goods and holidays
aboard and businesses have to meet the rising costs of imported raw materials and
components.
Finally, constantly varying exchange rates cause uncertainty. Businesses do not know
what is going to happen to exchange rates in the futures. This means that it is difficult to
predict demand for exports and the costs of imports.
1. Case Study
Beema is a successful business that makes shoes in Country B. It imports some of the
leather and the machines it uses, and exports 30 per cent of its output. Recently the
currency of Country B has fallen in value (depreciated). Beema’s managers are planning
to open a second factory. This will be located in Country C which already has several
shoe manufacturers. Country C has just agreed to stop using protectionism by removing
trade barriers such as import tariffs. Many of its industries are inefficient.
(a) Define ‘exchange rate’
(b) Define ‘exports.
(c) Outline two likely reasons why Beema is planning to become a multinational
business.
(d) Explain two effects on Beema of a depreciation of Country B’s currency.
(e) Do you think the government of Country C should encourage businesses such as
Beema to start operations in its country? Justify your answer.
