International trade and balance of payments
HELLO AGAIN. This is the penultimate lesson on social accounting and global trade. It consists of international trade and a portion of balance of payments.
INTERNATIONAL TRADE
When countries buy goods and services from each other, and/or sell goods and services to each other, this is referred to as international trade. International trade is thus trade among countries.
International trade is the largest scale in the development of division of labour and specialisation, wherein countries specialise in the goods and services that they can produce best and at the lowest cost, then trade with other countries to get the goods and services that they do not specialise in. You may ask: Why did international trade develop? Let us consider the reasons for international trade.
REASONS FOR INTERNATIONAL TRADE
1. Climate and soil type differences. Not all countries have the same climate and soil conditions. Different crops will grow where the climate and soil type differ.
2. Natural resources. These can only be mined where they are found, e.g., bauxite. Some countries are rich in mineral resources; others have little or none at all.
3. Special skills of the labour force. The type of labour determines what is produced. For example, France produces fashions (clothes), cologne and various types of cheese because the labour force has special skills and aptitude in these areas.
4. Lack of quantity and quality of local goods. Very often, countries import goods and services because what they produce locally is not enough for local needs and/or because the quality falls short of what is desirable.
5. Increased transportation and communication.
These have made trading on a worldwide scale much easier.
6. Access to a wider variety of goods and services.
Wider variety pleases consumers and results in an increase in their standard of living. The same is true for countries.
7. Foreign exchange. This is gained from exports and is used to pay for imports.
8. World output increases. This allows the problem of scarcity to be reduced.
9. Cheaper goods and services. Countries may import goods and services because they are cheaper than goods and services sold locally.
BALANCE OF PAYMENTS
International trade refers to trade among different countries of the world. When countries trade with each other, a record is kept of the financial transactions between them. This record is known as the balance of payments. It is a statement of the trade which takes place between a country’s residents (individuals, businesses and the government) and the residents of all foreign countries. Therefore, Jamaica’s balance of payments shows all the payments we receive from other countries and all payments which we make to them.
There are three components of the balance of payments account:
The current account
The capital account
The official financing account
We are going to analyse each account in turn. Please note that in all parts of the balance of payments account, exports and income are given a plus (+) sign, and imports and payments are given a minus (-) sign.
THE CURRENT ACCOUNT
This section of the balance of payments is divided into two parts: The visible trade account The invisible trade account
The visible trade account records the tangible items, i.e., the imports and exports of goods only. The difference between the money value of goods imported and goods exported is known as the visible trade balance or the balance of trade. This balance may be a plus (+) surplus or a minus (-) deficit. If exports exceed imports, the result will be a surplus or a favourable balance of trade. On the other hand, if imports exceed exports, there will be a deficit or unfavourable balance of trade.
The invisible trade account records the intangible items, i.e., the imports and exports of services, tourist expenditure and income, income from investments abroad and paid to investments abroad. The services include shipping, aviation and financial services. The balance on this account is known as the invisible balance and it will be a plus (+) favourable if exports (income) of the intangible items exceed the imports. Now you can work out for yourselves what will result in a minus (-) on this account.
The overall current account balance is the difference between our exports of goods and services and the imports of goods and services. As with the visible and invisible balances, the overall current balance may be favourable or unfavourable.
THE CAPITAL ACCOUNT
This account records capital flow, i.e., loans and grants to and from other countries, investments bought and sold. (Note that the income from investments is recorded in the invisibles of the current account.) As with the current account balance, the capital account balance may be favourable or unfavourable.
Now we need to consider the overall balance of payments figure. This takes into account the current account balance and the capital account balance. If, overall, the exports exceed the imports, the overall balance of payments will be a surplus (+) and if, overall, the imports exceed the exports, the overall balance will be a deficit (-). This means that the country spent more than it earned.
Next week, I will continue with the balance of payments and give you some questions on the topic. Keep safe until then.