Running head: INTERNATIONAL TRADE AND FINANCE

International Trade and Finance Submitted by Name of Student Name of Establishment Class XXXX, Section XXXX, Fall 2012

INTERNATIONAL TRADE AND FINANCE International Trade and Finance Introduction

International trade is the exchange of goods and services between the countries, and it is usually associated with the general internationalization and globalization of the worlds economical life and the intensification of the international division of the labor in the realities of scientific and technological revolution. International trade is an important tool of the development of the national economy as it helps to increase the operating efficiency and total production. The countries which export products receive significant economical benefits through the development of specialized industries. Because of the international trade the worlds economy can achieve a more efficient allocation of the resources and higher level of peoples welfare. Each country should produce such kinds of goods, production costs of which are relatively lower comparing to the costs in other countries, and exchange these goods. In addition to these benefits, the co-benefits of international trade which countries accumulate from the international division of labor should also be indicated. Free international trade encourages the competition and limits the dominance of the monopolies. The growing competition of foreign companies forces local firms to modernize production technologies, providing lower cost of the goods creation. The transition to the new technologies involves the usage of the latest advances in the science, which generally help to improve product quality, increase productivity and the general economical development of the country. Free international exchange of goods provides the consumers an opportunity to choose the products from a wider range of the assortment of goods produced in different countries of the world. So let us look closer at the effects of international trade to GDP, domestic markets and employers, their workers, and university students.

INTERNATIONAL TRADE AND FINANCE Main Body

International trade is a form of communication between producers from different countries, based on the international division of labor, and which expresses their mutual economical dependence. Nevertheless, every modern state along with the implementation the open economy policy tries to some extent limit the international intervention into its economic activities, leaving to supranational economic authorities just control functions for recommendations. Virtually all countries, even those whose economies are recognized to be as the most open, do not give up the policy of rigid protectionism. Thus, the advanced economies severely restrict the export of the latest techniques, the emigration of scientists and specialists, and monitor the ratio between the exports and imports. The developing countries tend to strictly limit the export of their existing strategic raw materials, restrict the export of currency, precious metals and other valuables. Internationally, such indicators as GDP, the structure of exports and imports, the volume, structure and dynamics of foreign investments etc are used in order to analyze the level of the activity of the country in the global economy. In order see the value of international trade, let us look at the value of GDP. Gross domestic product (GDP) is the market value of all final goods and services (those which are intended for direct consumption), made for the year in all sectors of the state economy for consumption, export and storage, regardless of the nationality of the production factors used. GDP is one of the most important indicators of economic development, which describes the final result of the production activity of residents in material and non-material production. There are two types of GDP: the nominal (absolute) and real (inflation-adjusted) GDP. The real GDP takes into account the extent to which GDP growth is determined by the real output growth, not the price increase. GDP is the sum of consumption, investment, government spending and exports minus

INTERNATIONAL TRADE AND FINANCE imports. GDP is calculated on a quarterly or the year basis.

GDP growth leads to the increase of the national currency rate. GDP depends on the value of the bond market, however, prices for stocks vary slightly, due to the predictability of GDP based on monthly statistics on its components. While looking at the effects of international trade to GDP, domestic markets and university students, the one should analyze the net export. If the net export is in the positive then GDP will increase, but if it is negative then the GDP will decrease. When GDP decreases, the tax rates go up which affect not only the employers and university students but also the domestic markets. This definitely harms especially if people are looking for going to school since the cost for education becomes much higher (Tom Gorman, 2003). While talking about the foreign exchange rates and how they are determined, the currency rates are usually implied. This is actually the amount that foreign countries will exchange, i.e. one currency in relation to another currency. The exchange rate is the value of two currencies relative to each other (Farlex Free Financial Dictionary). The dynamics of the exchange rate is determined by different factors. Firstly, the dynamics of the countrys exchange rate is influenced by the competitiveness of its products in the world markets, change of which in the long run is determined by the level of the technology development. High competitiveness provides the increase of export and thus stimulates the flow of foreign currency. This situation promotes the exchange rate of the monetary unit of the country. Secondly, the level of the exchange rate of the national monetary unit of the country is greatly affected by the inflation, which is a reflection of the imbalance between the money supply and commodity demand, prevailing in the countrys macroeconomic processes. In a country with high inflation the currency rate will decline comparable to the currencies of

INTERNATIONAL TRADE AND FINANCE

countries with a low rate of inflation. Depreciation of the national currency stimulates the long term growth of domestic prices. Gradual increase of internal prices compared to prices in other markets reduces the desire of foreigners to buy goods and services in a country with high rates of inflation. As a consequence, the flow of foreign currency into the country decreases, and devaluation of the currency takes place, reducing its exchange rate. Thirdly, the level of the exchange rate is closely linked with the state of the domestic financial market. If the difficult economic situation takes place in the country, and foreign investors are starting urgently sell local businesses, the state bonds and export capital abroad, the exchange rate of the national currency of the country will fall below falls below the purchasing power parity. And vise versa, if interest rates raise and the overall economic situation improves, the inflow of foreign capital will occur, which ultimately will enhance the exchange rate of the countrys monetary unit. The government also influences the fluctuations of the national currencies exchange rates. If it has a policy of export promotion, resulted in a countrys positive balance of payments, which will inevitably affect the real exchange rate of the national currency. The inadequate government policy to increase budget spending and the money supply will have an opposite effect as it will cause the increase the deficit in the balance of payments, reduce foreign reserves and ultimately cheaper currency exchange rate. In addition to long-term economic factors, the exchange rate fluctuations are also affected by many circumstantial factors related to the political situation in the country. In fact, the currency exchange rate also depends on how pessimistic or optimistic are people about government internal and external policy. Along with political factors, such factors as wars, natural disasters, major social conflicts and revolutions also have significant effects on the currency. The current exchange rate is actually highly dependent on foreign exchange dealers -

INTERNATIONAL TRADE AND FINANCE

brokers and speculators engaged in transactions with currency in the foreign exchange markets. Conclusion International trade is a set of international commodity-money relations, made up of the foreign trade among countries. The subjects of international trade can be individuals, legal entities, governments, international groups, trusts etc. International trade is the communication established between economic agents in different countries, and between countries of the world through trade, migration, labor, capital export, the international credit and currency relations, scientific, technical and production cooperation (World Savvy Monitor, 2008). Net export is an important economic indicator of the effectiveness of the countrys foreign activity. The value of net export is the difference between the value of export and import. This value has a multilateral influence on the level of national income. Even small changes in the volume of imports and exports, may involve changes in the levels of income, employment and the price level in the country. The effectiveness and usefulness of international trade can be achieved while making great efforts in order to overcome the many obstacles standing in the way of free trade. These obstacles include fees, import quotas, non-tariff barriers. Fee is particular kind of taxes on imported goods, and its role is to receive income to the states budget or to protect the national entrepreneurs. Analyzing the pros and cons of free trade and benefit-oriented trade for local businesses through hard protectionism, it should be acknowledged that historically free trade confirmed to be advantageous of for every agent of trade as it leads to economical growth, while protectionism can lead to the controversial results. Any discussion about the world economy will bring the light to both advantages and

INTERNATIONAL TRADE AND FINANCE

disadvantages of the free trade, which are highly subjective as the opinions on the advantages and disadvantages of free trade depend largely on personal beliefs, experience and opinion.

INTERNATIONAL TRADE AND FINANCE References

Tom Gorman. International Finance Effect on Imports, Exports, and GDP (2003). Infoplease. Retrieved from http://www.infoplease.com/cig/economics/effect-imports-exportsgdp.html The Exchange Rate. Farlex Free Financial Dictionary. Retrieved from http://financialdictionary.thefreedictionary.com/Foreign+Exchange+Rate Global Property and International Development (2008). International Trade Policy. World Savvy Monitor. Retrieved from http://worldsavvy.org/monitor/index.php?option=com_content&view=article&id=345&Itemi d=544