International economics: concepts and trade

International Economics

Economics, in general, relates to the inter-actions between economic clients that occur within the process of exchange. However, international economics brings in an extra element, that of internationality, and differs from simple microeconomics for the fact that it explains the occurring relations between participants at an international level. In this sense, international economics is important because it provides rules, theories and a specified framework in which international economical relations can work. More so, international economics refers to the whole of the participants (countries, companies, organizations) in the international economical circuit and is thus meant to identify these players.

With the creation of customs unions, such as the EEC, as a general characteristic, trade within the members of the union is encouraged and, at the same time, trade outside the union is discouraged. The main positive effect refers to the creation of trade, that is, to the fact that by creating a customs union, source of materials less efficient from outside the union will be replaced by the most profitable sources from within the union, which can be bought at a lower price because there are no more customs tariffs between the countries of the union. Following the definition of a customs union, the countries within the union will have no more customs tariffs within the union and will apply a common tariff for the countries outside the union. This will create a comparative advantage for the countries within the union because they will be able to sell outside the union at lower prices, due to lower cost of production.

18. Preferential trade agreements are agreements negotiated outside the WTO and GATT. This is somewhat a diversion from the WTO, as these are agreements negotiated outside the most favorable nation clause and a contradiction to the clauses involved within the WTO.

Trade creation refers to a customs union where the creation of new trade relations leads to the replacement of more costly sources of production and materials from outside the union with the most efficient sources from the union. However, if the more advantageous sources from outside the union have been replaced by less profitable sources from within the union, then we refer to trade diversion. This case usually occurs when the countries within the union decide to practice a collective protectionism towards the countries outside the union.

15. GATT was signed in 1949 and we must assert from the very beginning that it was not an organization, but an agreement. It was meant as the basis for the new trade organization that was to come together after the war, but given the climate of political affairs then, the project was abandoned. It was only in 1995 that the World Trade Organization (WTO) finally came into place, with the Final Round of negotiations at Uruguay that ended with the signing of the document at Marrakesch, which saw the creation of WTO.

The main issue within the OMC and its basis principle is the most favored nation clause. This basically states that a country member of the WTO has to give multilaterally to all the other members of the organization any commercial advantages that it has or will give out to any other state. The clause is given multilaterally after admission to the WTO. Only the United States negotiates the clause on a bilateral level.

The rounds of negotiations that have occurred within the WTO were generally meant towards global trade liberalization, through lowering of direct and indirect taxes between the members. As of today, discussions are leading towards a general reduction of direct quotas, corroborated with minimizing the indirect forms of protectionism.

25. Just as any other product in economy, there a supply and a demand for a certain currency and, just as any other product, it is influenced from the laws of supply and demand in that when the demand for a currency rises, almost certainly its price will rise as well (here, its quotation), while when the supply for the respective currency rises, its price will fall.

This gives out one of the functions of foreign exchange markets, that of regulation. Within the foreign exchange system, a country will have the ability of influencing some of the quotation for its national currency by playing on the foreign exchange markets, with a direct impact on the country's trade. Thus, if a country wants its currency to be cheaper, than it will sell its currency on the foreign exchange market, increasing supply for it. In terms of trade, this will lead to cheaper and more competitive products for export, giving a boost to the country's export's and influencing the country's balance of payment.

29. Devaluation and revaluation are techniques generally used in trade to adjust the country's balance of payment. Devaluation refers to a country's attempt to lessen the price for its currency by operations on the foreign exchange market. How does this influence trade? Devaluation of a currency means that the national producer will be able to produce at lower prices (due to devaluation) and this will allow them to make their product more price competitive on the international market. This method will allow be successful if the rate of inflation (corroborated with this measure) is smaller than the rate of devaluation. In this way, the difference between the two will represent a premium for the exporters. As a mean of promoting exports, this will influence the balance of payment, creating a surplus.

The exact opposite thing is revaluation which is a measure adopted when the inflation rate, caused by devaluation, has reached a level that is too high. Revaluation of the national currency discourages the national producers, as they will now be producing at a higher price.

7. The Heckscher- Ohlin Theory refers to the proportionality of production factors. The model follows the neoclassic theories (especially D. Ricardo and A. Smith) and borrows from them 4 basic elements:

the concept of comparative cost the concept of relative advantage in international trade the concept of reciprocal advantage between the partners involved in the trade the concept that a free and liberal trade is the main premise for an efficient international trade.

Heckscher and Ohlin have started from the general and relative advantages proclaimed by Ricardo and Smith and rephrased the principles taking into consideration each country's natural resources and factors of production, more so, work and capital. This facts led them to believe that a country will best produce goods for which it has a comparative advantage in a certain production factor, be it work or capital or natural resources. This differs from the Ricardian model that takes into account only work.