ECONOMICS
LEARNING UNIT 4
The foreign sector
Globalisation process: trade is expanding, and capital markets have developed, there is an
increase in tourism and technology is linking citizens from different countries. By opening
markets, sharing knowledge and increasing the efficiency of resources, GLOBALISATION CAN
EXPAND OPPORTUNITIES FOR PEOPLE AND REDUCE POVERTY
Risks of globalisation.
Increased vulnerability to external shocks, which originate in the foreign sector.
DEGREE OF OPENNESS – When a country is involved in the international community,
through the process of trade. This is measured by ….
- The average of:
- the value of exports as a percentage of GDP plus
- the value of imports as a percentage of GDE
REASONS FOR INTERNATIONAL TRADE – the idea is that countries must do what they do
best and then trade with other countries for those goods are services that they do not have
the skills to produce efficiently.
What countries are good at doing is directly related to their factor endowments.
A factor endowment represents
- Autarky- is the term used when a country tries to
how many resources a country
Be self-efficient. has at its disposal to be utilized
for manufacturing. Resources
such as labour, land, capital and
entrepreneurship.
Why do countries trade with each other?
Different climates
Different skills
Different factor endowments or uneven distribution of factors of
production.
Pure economic theory talks about………
Autarky
Specialisation
,Important theoretical reasons for trade:
Absolute advantage
Comparative advantage
THEORY OF TRADE
Absolute advantage = when it takes fewer resources to produce a good in one country than
in any other, or a country is simply able to produce more of a product with given resources,
this country has an ABSOLUTE ADVANTAGE.
Comparative advantage = this occurs when opportunity costs between countries differ and
each country tends to specialise in those products in which it has a COMPARATIVE
ADVANTAGE.
Understanding Absolute Advantage as a reason for international trade:
- A country should specialise in what it does best and trade with other countries.
Comparative advantage
- An economist, David Ricardo, identified that trade would take place even if one
country had an absolute advantage in the production of both goods.
- Ricardo noted that countries would benefit from trade if the opportunity costs of
production are different in each of the countries.
- Must be able to calculate opportunity cost= if the opportunity cost are they same for
both countries there is no basis for trade = there is an EQUAL ADVANTAGE
TRADE POLICY – Set of rules and regulations that impact on the level of exports and imports
of a country. The elements of trade policy include.
Export promotion
Import substitution.
Protectionism
Most governments implement some form of protectionist trade policies to protect
domestic business. MEASURES TO LIMIT IMPORTS OR BARRIERS TO TRADE ARE,
Import quotas.
Subsidies
Other non-tariff barriers: e.g., discriminatory administrative practices.
Exchange controls: limits amount of forex available.
Exchange rate policy: influencing the exchange rate.
IMPORT TARRIFS
, What is an import tariff?
“Tax” on imports Different types of import tariffs:
- Can be protective.
- Can be for revenue.
Categories of import tariffs
Specific tariff
A fixed amount, eg R40 on every item imported
Ad valorem tariff
As a percentage of the value, e.g., 2% on the purchase price of every
computer that is imported.
EXCHANGE RATES
Definition: The rate at which currencies are exchanged is known as the rate of exchange.
Quoting exchange rates
1. Direct method
$1 = R12.45 [foreign currency in terms of the domestic currency]
2. Indirect method
R1 = $0.081 [domestic currency in terms of the foreign currency]
Foreign exchange markets
Situation where the price of currencies is determined through the forces of demand
and supply.
When SA imports products from other countries they must
convert their Rands to foreign currency. There is a demand for
foreign currencies in south Africa. If other countries import
products from SA, they need to convert their currency to Rands.
This leads to a supply of foreign currencies. Exchange rates are
determined in a freely functioning foreign exchange market, in SA
the market for US dollars is the most important element of the
forex market.
EQUILIBRIUM IN THE FOREIGN EXCHANGE MARKET
LEARNING UNIT 4
The foreign sector
Globalisation process: trade is expanding, and capital markets have developed, there is an
increase in tourism and technology is linking citizens from different countries. By opening
markets, sharing knowledge and increasing the efficiency of resources, GLOBALISATION CAN
EXPAND OPPORTUNITIES FOR PEOPLE AND REDUCE POVERTY
Risks of globalisation.
Increased vulnerability to external shocks, which originate in the foreign sector.
DEGREE OF OPENNESS – When a country is involved in the international community,
through the process of trade. This is measured by ….
- The average of:
- the value of exports as a percentage of GDP plus
- the value of imports as a percentage of GDE
REASONS FOR INTERNATIONAL TRADE – the idea is that countries must do what they do
best and then trade with other countries for those goods are services that they do not have
the skills to produce efficiently.
What countries are good at doing is directly related to their factor endowments.
A factor endowment represents
- Autarky- is the term used when a country tries to
how many resources a country
Be self-efficient. has at its disposal to be utilized
for manufacturing. Resources
such as labour, land, capital and
entrepreneurship.
Why do countries trade with each other?
Different climates
Different skills
Different factor endowments or uneven distribution of factors of
production.
Pure economic theory talks about………
Autarky
Specialisation
,Important theoretical reasons for trade:
Absolute advantage
Comparative advantage
THEORY OF TRADE
Absolute advantage = when it takes fewer resources to produce a good in one country than
in any other, or a country is simply able to produce more of a product with given resources,
this country has an ABSOLUTE ADVANTAGE.
Comparative advantage = this occurs when opportunity costs between countries differ and
each country tends to specialise in those products in which it has a COMPARATIVE
ADVANTAGE.
Understanding Absolute Advantage as a reason for international trade:
- A country should specialise in what it does best and trade with other countries.
Comparative advantage
- An economist, David Ricardo, identified that trade would take place even if one
country had an absolute advantage in the production of both goods.
- Ricardo noted that countries would benefit from trade if the opportunity costs of
production are different in each of the countries.
- Must be able to calculate opportunity cost= if the opportunity cost are they same for
both countries there is no basis for trade = there is an EQUAL ADVANTAGE
TRADE POLICY – Set of rules and regulations that impact on the level of exports and imports
of a country. The elements of trade policy include.
Export promotion
Import substitution.
Protectionism
Most governments implement some form of protectionist trade policies to protect
domestic business. MEASURES TO LIMIT IMPORTS OR BARRIERS TO TRADE ARE,
Import quotas.
Subsidies
Other non-tariff barriers: e.g., discriminatory administrative practices.
Exchange controls: limits amount of forex available.
Exchange rate policy: influencing the exchange rate.
IMPORT TARRIFS
, What is an import tariff?
“Tax” on imports Different types of import tariffs:
- Can be protective.
- Can be for revenue.
Categories of import tariffs
Specific tariff
A fixed amount, eg R40 on every item imported
Ad valorem tariff
As a percentage of the value, e.g., 2% on the purchase price of every
computer that is imported.
EXCHANGE RATES
Definition: The rate at which currencies are exchanged is known as the rate of exchange.
Quoting exchange rates
1. Direct method
$1 = R12.45 [foreign currency in terms of the domestic currency]
2. Indirect method
R1 = $0.081 [domestic currency in terms of the foreign currency]
Foreign exchange markets
Situation where the price of currencies is determined through the forces of demand
and supply.
When SA imports products from other countries they must
convert their Rands to foreign currency. There is a demand for
foreign currencies in south Africa. If other countries import
products from SA, they need to convert their currency to Rands.
This leads to a supply of foreign currencies. Exchange rates are
determined in a freely functioning foreign exchange market, in SA
the market for US dollars is the most important element of the
forex market.
EQUILIBRIUM IN THE FOREIGN EXCHANGE MARKET
