International Trade, Balance of Payments and Exchange Rates
Domain 9 tests why countries trade, how trade is recorded and what moves exchange rates.
Gains from trade
Absolute advantage compares output per unit of input; comparative advantage compares opportunity costs. Even a country with no absolute advantage gains by specialising where its opportunity cost is lowest.
Balance of payments
The current account records trade in goods and services, income and transfers; the financial account records investment flows and reserve changes. The accounts must balance overall, with errors and omissions absorbing statistical discrepancies. A current account deficit must be financed by inflows or reserves.
Exchange rates
Appreciation raises the foreign currency price of exports and cheapens imports; depreciation does the reverse. Devaluation applies to fixed regimes; depreciation to floating ones. Namibia's peg to the rand means its effective exchange rate largely follows the rand.
Worked example
Namibia can produce 100 tonnes of fish or 50 tonnes of beef; Angola can produce 80 tonnes of either. The opportunity cost of one tonne of fish is 0.5 tonnes of beef in Namibia and 1 tonne in Angola. Namibia specialises in fish and Angola in beef, even though Namibia is absolutely more productive in fish.
Protection
Tariffs, quotas, subsidies and standards protect domestic producers but raise consumer prices and invite retaliation. Namibia trades through SACU, the Southern African Development Community and the African Continental Free Trade Area.
Traps that cost marks
- Confusing absolute with comparative advantage.
- Claiming a current account deficit is always harmful.
- Using devaluation and depreciation interchangeably.
- Forgetting that a balance of payments always balances in accounting terms.