Examination of the foreign exchange market, the establishment of exchange rates, and how the balance of payments account is affected. The main reasons for international trade The balance of payments Foreign exchange markets The establishment of foreign exchange rates Corrections of BOP surplus and deficit (disequilibria)

exchange of goods and services across international boundaries. International trade: exchange of goods and services across international boundaries. worldwide movement toward economic, financial, trade, and communications integration. Globalisation: worldwide movement toward economic, financial, trade, and communications integration.

Natural resources are unevenly distributed Labour and technology differences Differences in skills Lower production costs Inability to convert raw materials into consumer products.

due to specialisation, one country can produce a product at a lower cost than the other country. Absolute advantage: due to specialisation, one country can produce a product at a lower cost than the other country. What should they do?

What will equitable terms of trade be?

Current Opportunity Cost Domestic terms of trade for DVD’s Current Opportunity Cost/ Domestic terms of trade for DVD’s Opportunity cost of DVD’s lower in Japan. Basis for trade exists. SA5 Opportunity cost of DVDs in SA = 5 bags of wheat. Japan 0,25 Opportunity cost of DVDs in Japan = 0,25 bags of wheat. Ship 5 bags of wheat to Japan = 20 DVDs (5 ÷ 0.25 = 20) Trade is beneficial if SA specialise in wheat and trade surplus with Japan in exchange for DVD’s.

Opportunity cost Domestic Terms of Trade for Wheat Opportunity cost/ Domestic Terms of Trade for Wheat Japan 4 DVDs Opportunity cost of one bag of wheat in Japan = 4 DVDs SA0,2 DVDs Opportunity cost of one bag of wheat in SA = 0,2 DVDs Ship 4 DVDs to South you’d get 20 bags of wheat. (4 ÷ 0.2 = 20) Trade is beneficial if Japan specialise in DVD’s and trade surplus with SA in exchange for wheat.

If one country has absolute advantage everything, does not mean that they shouldn’t trade. Why not? Principle of comparative advantage.

SA has an absolute advantage in production of both Wheat and DVD’s Should SA trade with Japan??? We need to look at opportunity cost The opportunity cost of producing a DVD is lower in Japan than in SA. Relative absolute Relative cost of producing DVDs lower in Japan than SA even though absolute cost is higher. A basis for trade now exists. Japan specialise in DVDs. Exchange 1 DVD for 5 bags of wheat from SA. SA specialise in wheat Exchange 5 bags of wheat for 2,5 DVDs.