Exam (elaborations)
Foreign Exchange
- Institution
- University Of Cape Town (UCT)
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By: kimgroenewald1 • 4 year ago
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Foreign Exchange MarketInternational trade means that a country imports and exports g/s to or from other countries.
Main reasons for international trade:
Demand reasons
People have different tastes and it’s almost impossible for a country to produce
at a high standard and efficiently, every product that citizens may want.
Countries that try to be self-sufficient usually have a low standard of living.
Supply reason
Uneven distribution of income // most countries don’t have all the resources
required to produce a large range of g/s or produce enough output to satisfy
demand.
Difference in technology // some countries are able to use high levels of
technology
Difference in climate // countries have different climates and are therefore able
to produce different products
Different production techniques // efficient production requires different and
skilled production techniques which some countries don’t have
Absolute and comparative advantage //
A country has absolute advantage in producing a good compared to
another country if it’s able to produce more of the good with them same
set of resources. The country uses its resources more efficiently. [ country
A produces more of X than country B and country B produces more of Y
then A…therefore A has absolute advantage of good X and B has of good
Y]
A country has comparative advantage in producing a good even if it
doesn’t have an absolute advantage. It means that the country is
relatively more efficient in producing the food compared to another
county. [ even if A produces more X&Y then B , B can produce Y more
efficiently than A can so A has absolute advantage but B has comparative]
Effects of international trade:
o Increased production //
Development of communication has helped world trade expand
Communication increased sizes of markets
Development of global markets allowed firms to specialize in producing certain
goods to increase their production
o Increased employment //
Higher production encourages firms to employ more domestic FoPs. More people
have income to spend on needs and wants = greater standard of living
o Specialization //
International trade allows firms to specialize in producing output in which they
may have a comparative advantage.
Negative impact of international trade:
o Chinese have a comparative advantage in textiles therefor SA producers can’t compete
with low Chinese prices resulting in job loss
o Multinational firms exploit cheap labour and damage environment in foreign countries
, The balance of payments:
o All transactions undertaken by the citizens of a country with people and institutions in
the rest of the world
o Foreign exchange also known as (forex) refers to the currency of other countries
Current account:
o records transactions for the trade in g/s , primary flows and current transfers
Trade in goods:
When a country exports goods , foreigners demand the local currency and sell
their own = plus on the balance of payments account
when a country exports goods the people of that country sell their own currency
and buy foreign currency this is a minus on the balance of payments
Trade balance is the value of exported goods + net gold exports – the value of
imported goods
Positive trade balance is known as a surplus and a negative is a deficit.
Trade in Services:
Countries can import and export services i.e. tourist looking for accommodation
Primary income flows:
Payments in respect of interest and dividends made between citizens and rims in
different countries
Primary income inflows are a plus
Primary income outflows are a minus
Current Transfers:
Transfer payment is a transfer of income from one economic agent to another
Current transfers are payments such as pensions
Net transfers are the payments of transfers between countries
Capital transfer account:
o Shows the amount of money moving into and out of the country as a result of people
selling assets
Financial Account:
o Includes the value of the direct investment, portfolio and hot money into and out of the
country
Net direct investment flows:
Are inflows of money that are used to finance the purchase of resources either in
the form of existing companies or to set up new ones
Portfolio investment flows:
Refer to the flow of money to another country , where the money is used to buy
sharers tin companies quoted on that country’s securities exchange
Net other investment, hot money
Refer to the flow of money into and out of countries as investors seek to get the
highest rate of return
Change in reserves:
Reserves are the gold and foreign exchange held by the central bank
A change in reserves is a change in the value of the gold and foreign exchange held by
the central bank
Unrecorded transaction:
Are those transactions that are not recorded in the balance of payments
When SARB sells rands (buys foreign currency), it’s holding of foreign exchange increases
– shown as a negative on BoP because it’s an outflow
When SARB buys rands (sells foreign currency), it’s holding of foreign exchange decreases
– shown as a positive in the BoP because it’s an inflow
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