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