Q.
(a) Explain any THREE (3) of the following terms in relation to International Trade and Domestic Trade.
(i) Mobility of Production
(ii) Size of Market and Total Transaction
(iii) Monetary Units
(iv) National Policies
(v) Protectionism (15 marks)
(b) State any FOUR (4) effects of inflation. (10 marks)
(25 marks, 2016 Q6)
A.
In relation to International Trade and Domestic Trade
(i) Mobility of Production
Production of goods and services depends on the factors like cost of labour, proximity to sea port or air ports, raw materials and for some high-tech industries, the conducive academic environment of research and development. Mobility of production in relation to international trade and domestic trade is more of the cost of labour issue. Certain types of industries, esp low skill labour intensive industries, would move (thus mobile) to countries with cheaper labour cost. For example, textile industry. A lot of textile and fabrics manufacturing has shifted to countries like Vietnam and China where labour cost is much cheaper than the original countries of these brands - Nike, Adidas, etc.
Ref:
Own account.
(ii) Size of Market and Total Transaction
Size does matter. As the size of the industry is big, it attains the economics of scale which means the unit cost is much lower than producing in smaller quantities. In economics, it is when marginal cost equals to marginal revenue, ie the next unit if sold at cost, is able to sustain the business.
However, to achieve that, enormous amount has to be sold and not being left to waste or write off. With such production capacity, and at times, overly produced - it would need the excess to be absorbed by the outside market beyond its own country. For example, China has increased its capacity to produce exceeding the amount its own population could consume. Due to its enormous size, the economics of scale in production could yield a low unit price. Hence, it requires this surplus in production to be sold overseas. That is international trade.
Ref:
Own account.
(iii) Monetary Units
It is the unit of currency of a country. Like Ringgit Malaysia (RM) is the monetary unit in Malaysia. Monetary units is important in international trade for the purpose of exchange.
The exchange rate (foreign exchange) would enable the exchange of goods and services among different currency units of different countries or regions. A more stable currency unit would enable the trading between two countries more stable on a common measurement. It is like using a reference point to enable the calculation of value of goods and services. This currency is USD, which is the monetary unit of United States of America. Payment in USD would make trading of goods and services much easier. It is a common monetary unit understood and used by all.
Ref:
Own account.
(iv) National Policies
National policies here probably means National Trade Policies or Trade Policies of a country. Trade policy of a country is about how this country behave in its trade with other partners. It is very much its policy on exports and imports. This trade policies can interact with its domestic policies as further explained below.
Domestic policies include all policies targeted at domestic production, consumption, or other activities. They include production and consumption taxes and subsidies as well as income sales, property taxes, and domestic regulations. In contrast, trade policies are targeted directly at imports and exports such as import tariffs and quotas and export taxes and subsidies.
Production and consumption taxes and subsidies can stimulate imports or exports to occur. In other words, domestic policies can cause international trade. Domestic production and consumption taxes and subsidies will affect the level of international trade with the rest of the world. An import tariff applied on an imported product is equivalent in its economic effects to a combination of a domestic production subsidy and a domestic consumption tax of equal value applied on the same product.
Ref:
https://saylordotorg.github.io/text_international-trade-theory-and-policy/s11-domestic-policies-and-internat.html
(v) Protectionism
In a nutshell, protectionism is the theory or practice of shielding a country's domestic industries from foreign competition by taxing imports.
Protectionism refers to government actions and policies that restrict or restrain international trade, often done with the intent of protecting local businesses and jobs from foreign competition. Typical methods of protectionism are tariffs and quotas on imports and subsidies or tax cuts granted to local businesses. The primary objective of protectionism is to make local businesses or industries more competitive by increasing the price or restricting the quantity of imports entering the country.
Read more about protectionism below:
Many governments have set their central banks a target for a low but positive rate of inflation. They believe that persistently high inflation can have damaging economic and social consequences.
- Income redistribution: One risk of higher inflation is that it has a regressive effect on lower-income families and older people in society. This happen when prices for food and domestic utilities such as water and heating rises at a rapid rate
- Falling real incomes: With millions of people facing a cut in their wages or at best a pay freeze, rising inflation leads to a fall in real incomes.
- Negative real interest rates: If interest rates on savings accounts are lower than the rate of inflation, then people who rely on interest from their savings will be poorer. Real interest rates for millions of savers in the UK and many other countries have been negative for at least four years
- Cost of borrowing: High inflation may also lead to higher borrowing costs for businesses and people needing loans and mortgages as financial markets protect themselves against rising prices and increase the cost of borrowing on short and longer-term debt. There is also pressure on the government to increase the value of the state pension and unemployment benefits and other welfare payments as the cost of living climbs higher.
- Risks of wage inflation: High inflation can lead to an increase in pay claims as people look to protect their real incomes. This can lead to a rise in unit labour costs and lower profits for businesses
- Business competitiveness: If one country has a much higher rate of inflation than others for a considerable period of time, this will make its exports less price competitive in world markets. Eventually this may show through in reduced export orders, lower profits and fewer jobs, and also in a worsening of a country’s trade balance. A fall in exports can trigger negative multiplier and accelerator effects on national income and employment.
- Business uncertainty: High and volatile inflation is not good for business confidence partly because they cannot be sure of what their costs and prices are likely to be. This uncertainty might lead to a lower level of capital investment spending.
Overall, a high and volatile rate of inflation is widely considered to be damaging for an economy that trades in international markets.
- Uncertainty / business and consumer confidence
- The competitiveness of producers in international markets
- The effects on the real standard of living
- The possible impact on levels of income inequality
Ref:
https://www.tutor2u.net/economics/reference/inflation-consequences-of-inflation