CHAPTER 15ECONOMICS 3:

International Trade

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Foreign or International Trade

Foreign trade (or international trade) means selling goods and services to, and buying goods and services from, other counties.

An export is a good or service provided by the residents of a country that causes money to come into the country when sold.

An import is any good or service purchased by the residents of a country that causes money to go out of the country.

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Visible Exports and Visible Imports

Visible exports are physical products produced by the residents of a country that cause money to come into the country when sold. Examples of Ireland’s visible exports are:

Visible imports are physical goods purchased by the residents of a country that cause money to go out of the country. Examples of Ireland’s visible imports are:

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Invisible Exports and Invisible Imports

Invisible exports are services provided by the residents of a country that cause money to come into the country. Examples: incoming tourists and the sale of financial services abroad.

Invisible imports are services purchased by the residents of a country that cause money to go out of the country. Examples: outgoing tourists and “foreign” pop groups playing in Ireland.

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The Balance of Payments

The balance of payments is a record of a country’s economic transactions with the rest of the world.

It is made up of:1. The Balance of Trade2. The Balance on the Current Account3. The Capital Account

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Balance of Trade

The Balance of Trade is the difference between the value of visible exports and visible imports

€5,000mBalance of Trade (Surplus)

€15,000m - Total value of visible imports

€20,000mTotal value of visible exports

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The Balance on the Current Account

The Balance on The Current Account is the balance of trade plus or minus the difference between the value of invisible exports and imports (Sometimes, in JC exam questions, this is called the balance of payments)

€3,000mBalance on the Current Account

(€2,000m)€20,000mLess Total value of invisible imports

€18,000mTotal value of invisible exports

€5,000mBalance of Trade

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The Capital Account

The capital account shows the flow of all money into and out of the country.

Money can come into or go out of the country because of international trade, payments to and from the EU, and net direct foreign investment.

Net direct foreign investment is the difference between money invested in Ireland from abroad and money invested abroad by Irish residents.

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Reasons for Importing

1. Countries import to obtain raw materials not available in their own country that are needed by their domestic industries.

2. Countries import to obtain capital goods (e.g. machinery) not available in their own country that are needed by their domestic industries.

3. Countries import to obtain consumer goods that cannot be made, or cannot be made at a reasonable price, in their own countries.

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Reasons for Exporting

1. Countries export to earn money from abroad to pay for their imports.

2. Countries export in order to create employment in their own countries that would not otherwise be created.

3. Countries export in order to sell off their surplus production. Selling the surplus goods abroad earns extra income for these countries.

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Problems Facing Irish FirmsIn International Trade

Language differences makes communications more difficult.

Transport: all Irish exports must bear the additional cost of sea or air transport, as well as the normal road or rail transport.

Insurance costs are high due to the additional handling of goods arising from extra transport methods required.

Different countries set different minimum standards of production and different specifications for products.

Currencies change in value on a day to day basis adding greater risk for importers.

A worried man