ECONOMIA 3eva

Benefits and disadvantages of specialisation

Advantages:Enables increased output: as the production is

more efficient, with the same resources the output is maximised

Consumers have access to a greater variety of higher-quality

products from across the world

Specialisation and international trade increase the size of the

market, allows economies of scales, increases the GDP

Leads to a greater efficiency which leads to production being

carried out by the most efficient producers

Disadvantages: A country can be vulnerable if they need to

import too much A country can be vulnerable if they produce a

product that later on is replaced

Jobs in areas such as production may be vulnerable if cheaper

labour is available elsewhere.

A country can ve vulnerable to changes in the exchange rates



The current account of the balance of payments

The current account of the balance of payments shows the

income earned by a country and the expenditure it makes in

dealings with other countries. It consists in another 4 balances:

Balance of trade in goods and services: shows the flows of

money coming into and going out of a county as a result of

trading. Exports means money inflows, imports means money

outflows. It can be positive (if I sell more than I buy, which is

called credit) or it can be negative (if I buy more than I sell,

which is called debit). Obviously, the economy of a country

would benefit from exporting more than importing. This means

hat the world is financing my economy.

Net income or Income flows (money movement): are thetransfers from residents working abroad that are sending money

back to their original country, and the investment income earned

(profits, for example).

Current transfers (money movement): these are the transfers of

money, goods and services that are not part of the trading

process. For example, sending presents and gifts, donations,

charities, etc. Deficit and surplus The current account of the

balance of payments is the section of the account that shows

trade in goods and services. There are 2 possible options:

eXports > iMports = trade surplus

eXports < iMports = trade deficit

Trade deficits and surpluses release either to trade with a

particular partner (a country, for example) or as a total

(between a country and the rest of the world).



Current account deficit and surplus:

When a country is exposed to long-term deficit, it normally leads to:
-The country needs to issue public debt to pay for the goods/services

imported. And then has to pay interests on the debt. And pay

back the debt. So less and less money for that economy
-Loss of sovereignty. As they accept terms imposed by their

internacional lenders, they need to put in place normally

economic policies that they might not agree with

(for example, Greece)
-Fall in the value of the currency, so now they have to sell more

goods to get the same money, which is difficult-Imports become

more expensive, so the quality of life of the people living there

decreases

Causes and consequences of trade surplus
A country will normally have trade surplus if:
-Its exports are in high demand, or becomes the main

manufacturer of the world. For example, Vietnam with the textile

industry -Its exports are cheap due to the low exchange rate

against the other currencies. For example, China has maintained an

artificial exchange rate over the last 20 years in order to botheir exports
The main benefits of having a trade surplus are:
-With sales benefits kicks in. With more benefits, companies

will hire more people, produce more, get more economies of scale

(thus produce cheaper), and probably invest&innovate more,

getting more and more efficient -The country will be able to

build up foreign reserves, or invest

in other countries and obtain a benefit



The main drawbacks are:
-If the country sells better their products on the international

market, the consumers of the country could loose the possibility

of consuming such products-The rise of the value of the currency

(because there is more demand of the currency, as importers

need to pay in the country currency), so exports start becoming

more expensive. When we buy goods and services in our country,

we pay in the currency of our country (in the case of Spain,

in Euro), but most likely, when that store is buying the goods

from abroad (lets say, for example, clothes), is not paying in

Euro, but in the currency of the country of which is importing the

clothes. The exchange rate of a currency is determined by the

supply and the demand. If the demand increases, the “price” of

the currency increases as well. There are 2 options:

If there is high demand, the currency appreciates

(is more expensive) If there is low demand, the currency

depreciates (is cheaper)There are many factors that affect the

currency value, but one of the most important ones is

international trade. Most currencies have different exchange

rates, one exchange rate per currency.



Consequence of exchange rate fluctuations

Fluctuating exchange rates
Changing exchange rates affect governments, importers,

exporters, and the economy as a whole. Some effects of the

rises and falls in the value of a currency:
-Home currency appreciates: exports from home country

become more expensive to customers of other countries, therefore

less sales. Imports from other countries become cheaper,

including raw materiales and finished goods. Importers will find

goods from other countries cheaper to buy.  Value of imports

increases -Home currency depreciates: exports from the home

country become less expensive to customers from other

currencies, therefore easier to sell. Imports from other countries

become more expensive, so it is more expensive to buy.

Value of import increases

Methods of protection

Protection is restricting the entry of foreign goods into a domestic

market, imposing taxes to raise the price of imports and thus,

making them more expensive and less competitive.
Also, governments can limit the number of goods imported,

or to limit the availability of foreign exchange required to

purchase them.



Methods of trade protection:

-Import tariffs: tariffs are taxes. They increase the final value

of the imported good, reducing the price gap with the local

market prices
-Import quotas: it is a limit on the number of imports
-Import licensing: government can grant a licence for the

import of specific product. No license, no possibility to import
-Administrative complexity: bureaucracy. Tons of paperwork

might persuade companies not to export/import
-Subsidies: payments or free transfers of money to the local

producers of the home country. This will make final price to

consumers to be lower, and thus, more price competitive with

imports from third countries
-Exchange rate manipulation: governments can manipulate the

FX market in order to depreciate their own currency, making

exports from their country more competitive and price attractive
-Embargo: a complete ban on the import of certain types of

goods from specified countries.

Free trade is trading without any barriers. It enables countries

to specialise in what they do more efficiently and then trade

with others to buy what they do nor produce efficiently and at

a lower cost. Free trade tend to makes countries and people

more prosperous.Comparative advantage Specialisation

according to comparative advance is an economic theory which

states that a country should concentrate in produce what they

can produce more efficiently. In most of the cases this is because

they have access to raw materials, or highly skilled labour force.

For example, in India they have a lot of cotton, and they specialise

in the textile industry (access to cheap raw material), meanwhile

UK has London as an international financial hub



Benefits of free trade
Some of the benefits are:
Enables people to sell their products to those willing to pay the highest price
Increases the range of products available (Americas, potatoes, tobacco, etc)
Consumers can decide to buy better-quality products from other countries
Enhances the spread of new ideas, new lifestyles and new products
New job opportunities resulting from the growth of production
Increases quality of lime and value of the money