International Trade, Balance of Payments, Exchange Rates and Globalisation
This domain tests comparative advantage, protectionism, balance of payments accounting and exchange rate systems, with the CFA franc peg as the central Cameroonian case.
Trade theory
- Absolute advantage compares productivity; comparative advantage compares opportunity cost and shows that mutually beneficial trade is possible even when one country is better at everything.
- Terms of trade = export prices divided by import prices, multiplied by 100.
- Protection: tariffs, quotas, subsidies, standards and administrative barriers. Arguments include infant industry, revenue, dumping and balance of payments defence; costs include higher consumer prices, inefficiency and retaliation.
Balance of payments
- Current account: goods, services, primary income and transfers. Capital and financial accounts record investment flows; errors and omissions reconcile the accounts, which must balance overall.
- Cameroon typically exports oil, cocoa, timber, rubber and cotton and imports manufactures, rice, wheat and fuel, with a services deficit partly offset by remittances and aid.
Exchange rates
- The CFA franc is pegged to the euro at a fixed parity with convertibility guaranteed by the French Treasury; devaluation is a rare, collective CEMAC decision, as in 1994.
- Depreciation makes exports cheaper and imports dearer, improving the current account only if the Marshall-Lerner condition holds, and usually after a J-curve delay.
- Globalisation: trade and capital liberalisation, multinational firms, technology transfer and migration; regional arrangements include CEMAC's common external tariff, the interim economic partnership agreement with the EU and the African Continental Free Trade Area.
Worked example
Cameroon needs 10 labour hours for a tonne of cocoa and 20 for a bolt of cloth; Nigeria needs 6 and 3.
- Nigeria has an absolute advantage in both goods.
- Opportunity cost of cocoa: Cameroon gives up 0.5 cloth; Nigeria gives up 2 cloth.
- Cameroon has comparative advantage in cocoa, Nigeria in cloth. Cameroon should specialise in cocoa and trade for cloth at a rate between 0.5 and 2 cloth per tonne, gaining from exchange despite being less productive.
Traps that cost marks
- Confusing absolute with comparative advantage.
- Claiming the balance of payments is unbalanced; it balances through errors and omissions and reserve changes.
- Assuming a current account deficit is always harmful.
- Expecting devaluation to fix the trade balance immediately, ignoring the J-curve.
- Confusing a quota, which restricts quantity and creates quota rents, with a tariff, which raises revenue and a price.