Business Economics
Table of Contents
Introduction
1. How Does Supply and Demand of Foreign Currency Affect Exchange Rates?
2. Understanding Various Types of Trade Barriers and the Effectiveness of Institutional
Entities Which Impose Them
3. Positive Effects and Increased Economic Performance of the European Union
Conclusion
Bibliography
Introduction
One of the most important aspects of business economics is international trade
between various nations, who largely depend on one another while selling and
buying products at the world market. Being an exchange of goods and services
between the countries, international trade is the basis of world economy, giving
various producers an opportunity to make profit selling goods abroad rather
than being limited by the country borders. However, international trade benefits
not only single producers, it does also benefit different countries as a whole.
For example, a country possessing no significant natural resources like coal
or gas will be able to purchase them at the world market using the money, which
it earned, for example, from selling products of light industry. There are multiple
reasons why countries conduct international trade. The most important reasons
are lower costs of production at some regions, lack of mineral resources, scattered
location of specialized industries, differences in tastes and others. International
trade has a rather long history; however, it achieved the highest rate of importance
during the recent years due to the process of globalization, which resulted
in the openness of the borders and free flow of goods and services. International
trade affected the development of many countries in a positive way; however,
undeniable leaders of world trade are United States and countries-members of
the European Union. Proportion of products’ supply and demand at the world
market determines the fluctuation of exchange rates of different countries,
which is one of the essential indexes, showing the level of economic stability
in the country. Countries, with relatively firm exchange rate (exchange rate,
which fluctuates within certain borders) are usually better developed than those,
whose exchange rate is constantly and chaotically changing. Despite of all positive
effects of international trade, there are certain disadvantages of international
trade for certain groups of countries, and in order to eliminate these negative
effects countries impose certain trade barriers to eliminate the amount of imported
goods or to stimulate export. With the establishment of European Union and World
Trade Organization, international trade has received even more attention from
governments and businesses, who are trying to do their best to derive profits
from it.
The main goal of the current study is to analyze the state of the modern international
trade. In the context of this topic, the following points will be analyzed:
interdependence of supply and demand of the goods and exchange rates, trade
barriers and increased economic performance of the European Union.
1. How Does Supply and Demand of Foreign Currency Affect Exchange Rates?
Being one of the essential characteristic features of country’s economy,
exchange rate determines its level of economic stability while being influenced
by money supply and demand. In its essence, exchange rate refers to the price
of one currency expressed by certain amount of other currency. In other words,
exchange rate of one country’s currency shows how many units of a foreign
currency it is necessary to purchase one unit of the given currency. Also, exchange
rate determines how much money residents of the country pay for the goods that
are being imported and how much money they will get for the goods that are being
exported. In case when the value of the currency decreases, people have to pay
more for the imported goods, which become more expensive in relation to the
value of the currency. In such a situation, a country will have to reduce the
amount of the imported goods. On the contrary, foreign countries tend to purchase
more of the country’s goods, because they become less expensive, which
results in the increase of exports.
For many years economists have been trying to study the nature of the exchange
rates in order to find out what factors influence it. However, in 1944 representatives
of industrialized countries, who met in Bretton Woods, New Hampshire, decided
to “fix the rate of exchange for all foreign currencies to the U.S. dollar”
[6] and to tie dollar to the gold in order to have a fixed price of it. At that
time, it was considered that fixed exchange rate of the U.S. dollar will provide
international stability. However, the system did not work, and indeed, caused
a faster pace of inflation in the foreign countries. According to the authors
of the book “Exchange Rate Dynamics: A New Open Economy Macroeconomics
Perspective”, “Exchange rate determination has been the “holy
grail” of international finance and macroeconomics ever since the collapse
of the Bretton Woods regime in 1971 and the ensuing period of high exchange
rate volatility” [3]. Nowadays, the exchange rate of the majority of world
currencies is floating, which means that there is no exact value of any currency
that is fixed and it is changing due to the multiple factors. Major factors
influencing the exchange rate of any currency is the supply and demand of the
given currency at the international exchange markets, which are markets where
one currency is traded into another one. Besides supply and demand of currency,
other factors also influence its exchange rate, which include: interest rate,
inflation, investment, trade balance and others.
No government can control exchange rate of any currency; however, the prices
of foreign currencies are established at the FOREX (foreign exchange) market
by means of the laws of supply and demand. Price for any currency is determined
by the agents’ desire who participate in FOREX to purchase or sell given
currency aiming at making profit during such transactions. Fluctuation of exchange
rates complies with the laws of supply and demand of money. For example, according
to the law of supply, if the price for currency increases, its quantity offered
to sell in the market will also increase; on the contrary, if price declines,
the quantity offered will decrease. According to the law of demand, if the price
for money rises, the demand for it will decline, while it will rise together
with the decrease of prices for currency. These two principles determine price
fluctuation at the FOREX market. However, exchange rate is not only related
to supply and demand of money. It also closely interacts with the supply and
demand of foreign goods and services which are traded at the international market.
For example, if the price of foreign currency will be lower in U.S. dollars,
it “will lower the price of foreign goods to U.S. residents and raise
imports [2], and it will also “raise the price of U.S. goods to foreigners
and lower exports” [2].
2. Understanding Various Types of Trade Barriers and the Effectiveness of Institutional
Entities Which Impose Them
Before naming and explaining various types of trade barriers it is necessary
to determine the meaning of a trade barrier. Trade barriers are known to be
government laws and regulations, policies or practices which are designed to
restrict the amount and variety of imported goods with the goal to protect domestic
producers from foreign competitors or in order to stimulate export of certain
types of domestic goods. By means of trade barriers governments of different
countries limit the existing free international exchange of goods and services.
On one hand trade barriers have a negative impact on the global economy, preventing
the latter from free functioning. On the other hand, certain positive consequences
of the implementation of trade barriers also exist. There are various types
and forms of trade barriers; however, there are two distinguished and commonly
acknowledged groups of trade barriers existing nowadays. They are tariff and
non-tariff trade barriers.
The first group of trade barriers to be discussed will be tariff trade barriers,
which include customs duties, which are in the form of import tariffs, countervailing
duties, anti-dumping duties, tariff-rate quotas and others. Tariffs are considered
to be the oldest form of government taxes imposed on imported goods. There are
two main reasons for the implementation of tariffs. First, tariffs provide government
with certain revenue. Secondly, “they improve economic returns to firms
and suppliers of resources to domestic industry that face competition from foreign
imports” [4]. The majority of countries widely use tariffs in order to
protect domestic producers from foreign competitors, who are able to produce
goods and render services at lower prices than domestic ones. Thus, domestic
consumers have two choices: to use domestic products or to pay higher prices
for imported goods. Some of the tariffs that “are set high enough can
block all trade and act just like import bans” [4], preventing any foreign
products from entering domestic market of a country. Speaking about countervailing
duty, it is necessary to mention that this kind of duty is “imposed in
addition to the regular (general) import duty, in order to counteract or offset
the subsidy and bounty paid to foreign export-manufacturers by their government
as an incentive to export, that would reduce the cost of goods” [7]. Anti-dumping
duty is similar to countervailing duty in terms that it is also imposed in addition
to import duty. The main goal of imposing this kind of duty is to “offset
the advantage gained by the foreign exporters when they sell their goods to
an importing country at a price far lower than their domestic selling price
or below cost” [7]. Anti-dumping actions may be taken by any government
in a situation “where there is genuine (“material”) injury
to the competing domestic industry” [8]. A tariff-rate quota (TRQ) is
another type of tariff trade barrier, which combines the qualities of quota
and tariff. The main idea of TRQ is that it “will set a low tariff for
imports of a fixed quantity and a higher tariff for any imports that exceed
that initial quantity” [4].
The second group of trade barriers is known as non-tariff barriers, which includes:
import and export quotas; import licences; domestic content requirements; technical
barriers to trade; import state trading enterprises; exchange rate management
policies; and environment-related trade barriers. The simplest and most wide-spread
forms of non-tariff barriers are import and export quotas, which are used to
determine the quantity of goods which can be imported or exported. Usually,
quotas are used to limit the import or export of specific groups of products.
Speaking about import licences it is necessary to emphasize the fact that they
have been proved to be rather effective at restricting imports. The main idea
of import licences is that “importers of a commodity are required to obtain
a license for each shipment they bring into the country” [4], which gives
the importing country an opportunity to “restrict imports on any basis
it chooses through its allocation of import licenses” [4]. In order to
restrict imports governments can impose domestic content requirements, which
are designed to stimulate further development of domestic industries of different
countries. The essence of domestic content regulations lies in the following.
It is used to “specify the percentage of a product’s total value
that must be produced domestically in order for the product to be sold in the
domestic market” [4]. Most often domestic content regulations are used
to stimulate the development of agriculture or automobile industry, for example.
The following type of non-tariff trade barriers are technical barriers to trade,
which include special rules and regulations concerning packaging of the goods,
their labelling and etc. Import state trading enterprises are specially established
agencies owned by the government or sanctioned by it so they “act as partial
or pure single buyer importers of a commodity or set of commodities in world
markets” [4]. They are authorized to implement certain types of import
quotas and design import rules, which would make imports less profitable. Another
way by means countries can restrict imports is through changing their exchange
rates in the context of exchange rate management policies. Artificial decrease
of the price of country’s currency will lead to the increase of prices
for imported goods and decrease of the amount of imported goods purchased. The
last type of barriers to trade to speak about will be environment-related trade
barriers. The main idea of this type of trade barriers is that they enable governments
to “restrict free trade in order to protect human and animal health, or
to preserve plants, as far as enforced restrictions are transparent, rely on
a scientific evaluation, provide a protection level compatible with international
norms, or with scientific assessments, and offer to imports as a whole national
treatment” [1]. Environment-related trade barriers are relatively new
as compared to other types of barriers, however, they are necessary, because
there are so many products, which may not be properly tested and cause harm
unless they are forbidden to import. The necessity to impose such barriers is
rather justified due to the increase of the number of people with cancer and
birth defects, environmental pollution with toxic chemicals and radioactive
nuclides, changes in climate and other negative effects of thoughtless human
actions.
Speaking about institutions, which impose trade barriers, they are mainly governments
of different countries, or specially designed and sanctioned agencies, working
rather effectively at restricting international trade and protecting domestic
producers. As it has been stated above, some of the trade barriers have a positive
impact if the assist the development of domestic industries, while others have
a significant negative impact, because they put limitations on free flow of
commodities across the countries.
3. Positive Effects and Increased Economic Performance of the European Union
The European Union (EU) is a very powerful player at the global market scene,
which is responsible for significant share of the world’s imports and
exports. Free flow of goods and services inside of the Union has predetermined
further economic development of the countries-members of the EU. It has opened
the borders eliminating unnecessary “technical, regulatory, legal, bureaucratic,
cultural and protectionist barriers that stifled free trade and free movement
within the Union” [5]. The establishment of free market trade has brought
certain benefits to all the members of the EU. According to the Commission of
the EU, which has made the advantages of free market public, the single market
of the European Union has “created 2.5 million new jobs since 1993 and
generated more than ˆ800 billion in extra wealth” [5], “has
brought down the price of national telephone calls to a fraction of what they
were ten years ago” [5], has decreased the prices for airplane tickets
and has “enabled more than 15 million Europeans to go to another EU country
to work or spend their retirement” [5]. When the national borders of all
countries-members became opened, domestic producers faced competition and had
to come up with new technologies, look for cheaper raw materials, increase productivity
of the workforce in order to decrease the prices and satisfy the growing demands
of new consumers across the Union. Lower prices benefited everybody –
consumers and producers. The usage of the single market inside the EU has lead
to market liberalisation and elimination of monopoly markets. Despite of the
fact that the EU was able to reach significant success in its economic development,
there are certain sectors of its economy which strongly require further development.
This, for example, includes service sector, which wasn’t able to open
as fast as markets for goods. Such sectors of service include financial services
and transportation (railway and air). Besides, special attention needs to be
paid to the acceptance of various norms and standards existing within different
countries-members of EU, and especially different tax systems.
Conclusion
Having spoken about key components of international business economics, such
as exchange rates, trade barriers and a key player of international market –
the European Union, it is necessary to make a conclusion. There is no doubt
that all countries of the world will continue to integrate into the global economy,
making new positive and negative consequences emerge from further integration.
Nowadays, there is hardly any country, which is not engaged into international
trade. International trade is a tempting way of making profits, which it offers
to anybody who has something to sell or financial resources to buy. Obvious
advantage of international trade is not only that it allows businesses to have
more consumers by entering national markets, but that it helps countries that
lack some sort of resources purchase them at the international market with the
minimum of obstacles. In contrast, countries having surplus of certain resources
may sell them and make additional profit. Besides, international trade is a
wonderful opportunity for any enterprise aiming at selling goods abroad. However,
there are certain factors, which have to be considered while conducting international
trade. First of all it is the exchange rates of national currencies, which may
affect foreign trade in a positive as well as in a negative way. Also, it is
necessary to keep in mind the existence of trade barriers aiming at eliminating
imports and protecting domestic products. Establishment of such a powerful union
as the European Union manages to overcome almost all of the mentioned above
obstacles and provide all of its countries-members with free flow of goods and
services.
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