Factors Affecting International Trade Flows
International trade can significantly affect a country’s
economy, it is important to identify and monitor the factors that influence it.
The most influential factors are:
1. 1. Inflation
Impact of Inflation:
If a country’s inflation rate increases
relative to the countries with which it trades, its current account will be
expected to decrease, other things are equal. Consumers and corporations in
that country will most likely purchase more goods overseas (due to high local
inflation), while the country’s exports to other countries will decline. Suppose
an economy consists of three goods: pen, pad, dairy. The prices of pen, pad and
dairy, respectively, are 20, 40, and 90 cents, respectively. The average price
of these three goods is 50 cents. That is also the price level.
The
inflation rate is the positive percentage change in the price level on an
annual basis. When you know the inflation rate, you can find out whether your
income is (1) keeping up with (2) not keeping up with, or (3) more than keeping
up with inflation. How you are doing depends on whether your income is rising
by (1) same percentage as, (2) a smaller percentage than, or (3) a greater
percentage than the inflation rate. When you make this computation and
comparison, you are determining your real income for different years.
Impact of National Income:
If a
country’s income level increases by a higher percentage than those of other
countries, its current account is expected to decrease, other things being
equal. As the real income level rises, so does consumption of goods. A
percentage of that increase in consumption will most likely reflect an
increased demand for foreign goods.
Impact of
Government Policies:
A country’s
government can have a major effect on its balance of trade due to its policies
on subsidizing exporters, restrictions on imports, or lack of enforcement on
piracy. Some point discussed below;
·
Subsidies for Exporters
·
Restrictions on Imports
·
Lack of Restrictions on Piracy
Subsidies for Exporters:
Some
government offers subsidies to their domestic firms, so that those firms can
produce products at a lower cost than their global competitors. Thus, the
demand for the exports produced by those firms is higher as a result of
subsidies.
Restrictions on Imports:
If a
country’s government imposes a tax on imported goods (referred to as tariff),
the price of foreign goods to consumers are effectively increased. Tariffs
imposed by the U.S. government are on average lower than those imposed by other
governments. American apparel products and farm products have historically
received more protection against foreign competition through high tariffs on
related imports.
A
government can reduce its country’s imports by enforcing a quota, or a maximum
limit that can be imported. Quotas have been commonly applied to a variety of
goods imported by the U.S. and other countries.
Lack of
Restrictions on Piracy:
A
government can affect international trade flows by its lack of restrictions on
piracy, in some cases.
Impact of Exchange Rates:
Each
country’s currency is valued in terms of other currencies through the use of
exchange rates, so that currencies can be exchanged to facilitate international
transactions. The value of most currencies can fluctuate over time because of
market and government forces. If a country’s currency begins to rise in value
against other currencies, its current account balance should decrease, other
things being equal. As the currency strengthens, goods exported by that country
will become more expensive to the importing countries. As a consequence, the
demand for such goods will decrease.
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