Balance Of Visible And Invisible Trade

With trade, each country can concentrate on producing goods and services that it produces more efficiently, while trading to obtain goods and services that it does not produce effectively.

As an outcome, the total outcome of trading nations can be increased, leading to higher living expectations of the residents of these nations. The common benefits realised consequently of trade are the benefits from trade.

1. 1 Theory Of Comparative Advantage

The theory of comparative advantages attempts to make clear what contributes to increases from trade.


Resources are fully employed

Only two countries (e. g. A and B)

Two products (e. g. rice and towel)

No transportation cost for goods across nationwide boundaries

The following stand shows the levels of rice and fabric that can be produced

with one unit of resources in Country A and Country B

Rice (Kg)

Cloth (Lawn)

Country A



Country B



The following stand shows the chance costs of grain and material in Countries A and B

Rice (Kg)

Cloth (Garden)

Country A

0. 6 yards of cloth

1. 67 kg of rice

Country B

2. 0 back yards of cloth

0. 50 kg of rice

The table demonstrates the sacrifice of material in producing grain is much reduced Country A than it is at Country B. Country A has less cost in producing grain.

Similarly, the sacrifice of grain involved with producing one backyard of cloth is lower in Country B than in Country A. Country B gets the lower cost in producing towel.

If trade is allowed between these two countries, they can specialise in the production of goods which may have lower opportunity cost. The following illustrates the changes in creation caused by each country's producing yet another unit of any commodity in which it has the lower opportunity cost

Rice (Kg)

Cloth (Garden)

Country A

+1. 0

-0. 6

Country B

-0. 5

+1. 0

Changes in production

+0. 5

+0. 4

The total production will increase because of the re-allocation of resources when trade can be done between both of these countries. These are increases in size from trade, which arise from differing opportunity costs in both countries.


A country is said to have a comparative gain in the creation of a

good if it's in a position to produce that proficient at lower opportunity cost than other


Differences in opportunity costs in producing both goods make it possible to increase production of both goods by the right re-allocation of resources within each country. Therefore, increases in size from specialisation and trade be based upon the style of comparative advantages.

1. 2 Trade Restrictions

A country can impose different restrictions on international trade for various reasons.

1. 2. 1 Tariffs


A tariff is a kind of tax enforced on imports.

Tariffs can improve the price of international products when they enter into a country. The quantity demanded for brought in goods will fall season, while the demand for home goods increase. This brings tariff earnings to the government, which represents a transfer from consumers and makers.

Tariffs can be levied with an advertising valorem basis, which is really as a percentage of the worthiness of the transfer, or they could be levied on a particular basis, which is over a device of weight or specific amount.

Figure 1 The effects of a tariff

1. 2. 2 Quotas


A quota is a limit on the number of a product which may be imported during

a particular time frame.

Figure 2 The effects of your quota

The producing price can be the identical to that of tariff (i. e. $7), as in Figure 2, if the quota is carefully set. Local demand for the import substitute will increase and domestic job can be protected.

1. 2. 3 Embargoes


An embargo is a ban on certain goods to be brought in into a country.

These are usually enforced for non-economic reasons, such as war or political distinctions (i. e. Cuba and North Korea).

1. 2. 4 Exchange controls

Since trade requires funding with international exchanges, the federal government can impose trade restrictions by instituting exchange adjustments. Under the exchange controls, the federal government demands that all overseas receipts be surrendered to the central loan provider in trade for national money, and all overseas repayments be approved in order to obtain the necessary foreign exchange. Thus, the government monopolises all international receipts, and everything foreign payments have to be decided by it.

1. 2. 5 Administrative procedures

Some discriminatory administrative tactics such as stricter cleanliness regulations for brought in foodstuffs and safeness standards for gadgets can be imposed to limit imports.

1. 2. 6 Subsidies to local goods

The government gives subsidies to suppliers to be able to lower the selling prices. This will boost the competitiveness of local output when confronted with foreign competition.

Activity 1

A tariff only restricts the import price and a quota only restricts the transfer amount. Explain whether this affirmation is true or false.

1. 3 Reasons For Trade Protectionism

Main reasons for countries to restrict trade are

To protect infant industries

A new industry will not be able to compete with large established international firms far away as they can operate at lower costs anticipated to economies of scale. Trade obstacles are imposed to protect firms from overseas competition in an attempt to allow the industry to develop in the wish that it'll finally have the ability to compete with well-established foreign firms.

To safeguard employment

If import goods are made more costly or their amount is restricted, consumers will buy more domestic goods instead. Because of this, more local labour will be used and the unemployment rate is reduced.

Defence reasons

Many proper resources such as fossil fuels, flat iron, material and agricultural produce are crucial for national defence. Many countries impose quotas and tariffs to safeguard domestic production so as to ensure they are not reliant on other countries for these essential goods.

To obtain revenue

The revenue brought up from tariffs can be considered a major source of government earnings.

To correct trade deficits

A country may try to reduce imports when the wages from exports cannot find the money for to cover imports.



The balance of obligations is a record of all trades of an country with all of those other world over a given time frame.

It includes any economical transactions that result in

receipt of foreign currency from in foreign countries are credit items

payment of foreign currency abroad are debit items

2. 1 Balance Of Obligations Accounts

Balance Of Payments Accounts




(A) Current account

(a) Visible trade

(i) Exports of goods


(ii) Imports of goods


Balance of noticeable trade

(A - B) = C

(b) Invisible trade

(i) Services

- Exports of services


- Imports of services


(ii) Interest and dividends

- Receipts from abroad


- Repayments abroad


(iii) Exchanges (remittance, donations,

international assists, etc. )

- Receipts from abroad


- Obligations abroad


Balance of unseen trade

(D - E) + (F - G)

+ (H - I) = J

Balance of current account

C + J = K

(B) Capital account

(a) Capital inflow


(b) Capital outflow


Balance of capital account

L - M = N

Balance of current accounts plus balance

of capital account

K + N = P

(C) Public reserve account


Total balance


2. 2 Components Of The Balance Of Payments

2. 2. 1 Current account

This is a record of all orders in goods, services, interest and dividends, and world wide web transfers between a country and other countries. This bill is further split into obvious trade and unseen trade.

Visible trade

Visible trade refers to the export and transfer of physical goods, e. g. raw materials, food and created goods. The difference between your value of export and import of goods is named the balance of noticeable trade.

If the value of exports exceeds the value of imports, the country loves a favourable balance of obvious trade, or trade surplus. If the value of imports surpasses the value of exports, the united states suffers an unfavourable balance of obvious trade, or trade deficit. The country has a well-balanced balance of obvious trade when its value of exports equals value of imports.

Invisible trade

Invisible trade refers to the export and transfer of services (includes transportation services, insurance services, holiday costs, etc. ), interest, dividends, products, remittance, donations and international help.

Current account

The total of world wide web exports, net income received from investment funds abroad, and world wide web transfers from in another country. If a country has a positive current account balance, its current bank account is within surplus; when there is a negative current account, it is a current bank account deficit.

2. 2. 2 Capital account

The capital accounts information all capital motions, i. e. the inflow and outflow of capital of a country.

Short-term capital stream identifies the motions of capital for short-term profit, known as hot money, e. g. countries supplying a higher rate appealing can often appeal to the inflow of short-term capital.

Long-term capital move refers to the movements of capital for acquiring long-term belongings such as office properties. International lending options are also capital exchanges in one country to some other. If the full total inflows surpass total outflows of capital cash, there will be a favourable balance on the capital bank account (a capital profile surplus). If total outflows exceed total inflows of capital cash, you will see an unfavourable balance on the administrative centre consideration (a capital accounts deficit).

2. 2. 3 Standard reserve account

It is an archive of the changes in official reserves as due to international deals.

A country's public reserves consist of resources that are accepted as payment in international trade, e. g. foreign currencies. This account could also track record a government's borrowings from other countries and financing to other countries.

Activity 2

If a country experience an equilibrium of trade deficit, its current profile will also run into a deficit. Can you recognize? Explain why.

2. 3 Payment Balances And Imbalances

2. 3. 1 Balance of obligations must always balance

The sum of the amounts on the three accounts always equals zero. Quite simply, when all the repayments and receipts of the country are added up, they need to be add up to zero.

2. 3. 2 Some parts of payments accounts do not need to balance

Although the overall repayments must balance, some parts of the repayments accounts do not need to balance. The terms that balance of obligations deficit and balance of repayments surplus are usually known as the balance on the sum of current and the administrative centre accounts.

If the full total debits exceed the total credits in today's and capital accounts, the web debit balance means that the united states suffers the total amount of payments deficit. This deficit symbolizes a personal debt to foreign countries and must be resolved with the same withdrawal (i. e. world wide web credit balance) in the country's recognized reserve account. An equilibrium of payments deficit means that the central standard bank is reducing its reserves.

If the total credits exceed the total debits in both accounts, the country enjoys an equilibrium of repayments surplus. Other nations need to pay gold or forex which means that the central standard bank is increasing its foreign exchange reserves.



The exchange rate of an currency is thought as the price tag on that currency in terms of another money.

The demand and supply of that money determine the exchange rate in a freely flexible forex.

3. 1 Demand For A Currency

The quantity of a currency of any country, say X, will depend on holders of other currencies desperate to exchange those currencies for the currency of Country X. People choose the money because they can then choose the goods and services of Country X. They can also buy the resources of Country X, such as real property.

Just much like all other demand curves, the demand curve for a forex, e. g. Japanese yen, is downward sloping. If the price tag on yen drops, more yen will be demanded.

Figure 3 The demand for US dollars

3. 2 Source Of A Currency

People sell the money in order to buy international goods and services, and foreign assets. The resource curve of the money is upwards sloping. All other things being equal, the higher the exchange rate, the greater is the amount of the currency provided in the foreign exchange market.

Figure 4 The way to obtain US dollars

3. 3 Market Equilibrium

The demand and offer of a money in market can determine the exchange rate of this currency. The next diagram shows the intersection of the demand curve and offer curve of your currency

Figure 5 Equilibrium exchange rate

3. 4 Types Of Exchange Rate Systems

3. 4. 1 Predetermined exchange rate system

Under such something, the exchange rate is set with other currencies. Central bankers are held in charge of maintaining the prices of their currencies. If the government decreases the exchange rate of its money in terms of other currencies, it devalues (i. e. devaluation) its money. When it increases the exchange rate of its money in terms of other currencies, it revalues (i. e. revaluation) its money.

3. 4. 2 Floating exchange rate system

Under such a system, the exchange rate of a currency is easily adjustable, i. e. by demand and supply. Once the exchange rate of your country's money in terms of another currency increases, the currency is thought to appreciate (i. e. understanding). Once the exchange rate decreases, it is said that the currency depreciates (depreciation).

Chapter Review

Re-allocation of resources contributes to specialisation and increases from trade.

An equilibrium of repayment surplus will add to the official reserve bank account and a deficit will lower the state reserve bill.

What You Need To Know

International trade: Exchange of goods and services across international restrictions.

Comparative advantage: The advantage a country has if it's able to produce a tradable proficient at a lower opportunity cost than other countries.

Tariff: A form of tax enforced on imports.

Quota: Limit on the quantity of a product which can be imported during a particular period of time.

Balance of repayments: A record of all trades of the country with all of those other world over confirmed period of time.

Exchange rate: The price of a money in terms of another money.

Work Them Out

1. Known reasons for restricting international trade are

(i) currency differences

(ii) nationwide security reasons

(iii) trade protectionism

(iv) high transportation cost

A (i) and (ii)

B (ii) and (iii)

C (ii), (iii) and (iv)

D (i), (ii) and (iii)

2. Which of listed below are trade protectionist methods?

(i) subsidies to local industries

(ii) transfer quotas

(iii) import tariff

(iv) overseas exchanges control

A (i) and (ii)

B (ii) and (iii)

C (i), (ii) and (iii)

D All of the above

3. Which of the following can be an item in today's account of the total amount of obligations?

A Visitors expenditures in Hong Kong

B Direct international investment

C Imports of overseas goods

D Send goods oversea by foreign shipping company

4. Which of the following is not really a reason behind trade protectionism?

A Newborn industry protection

B Country wide defence

C Correct balance of repayment deficit

D Promote comparative advantage

5. A tariff will

(i) improve the price of brought in goods

(ii) lower the level of local ingestion of the brought in goods

(iii) improve the level of local development of the substitute

(iv) increase the level of local wage rates

A (i) and (ii)

B (i), (ii) and (iii)

C (ii), (iii) and (iv)

D All of the above

6. The following are effects of transfer quota

(i) Level of high-quality imported goods will rise

(ii) Domestic development will fall

(iii) Price of the brought in goods rises

(iv) Trade size decreases

A (i), (ii) and (iii)

B (i), (iii) and (iv)

C (ii), (iii) and (iv)

D All of the above

7. Country X has a comparative advantage in producing commodity M if

A it can produce more M than other countries

B it may use less resources to produce M

C it can produce M at lower opportunity cost

D it has sufficient resources to produce M

8. Balance of repayment deficit can be induced when

(i) demand for brought in goods rises

(ii) inflow of capital increases

(iii) more holidaymakers stay in our hotels

(iv) more shipping and delivery services can be purchased to abroad companies

A (i)

B (ii) and (ii)

C (i), (ii) and (iii)

D All of the above

9. The exchange rate of any currency is identified as

A the term of trade of any country

B the amount of another currency that may be exchanged with

C the maximum price of the currency

D the intrinsic value of your currency

10. The remittance of money from Hong Kong to Australia is documented in the

A current account

B capital account

C standard account

D financial account


Determine if the transactions would arrive in the Hong Kong's balance of obligations account within the capital consideration or the current bill and whether each is a credit or a debit item.

An office machine sold by a USA company to Hong Kong

A Hong Kong resident buys a house in Australia

Japanese firm sets up a seed in Hong Kong

A wealthy man in the USA deposits money in Hong Kong

A Hong Kong buyer will get dividends from his investment in the USA

A Canadian aeroplanes uses the getting facilities of Hong Kong International Airport

A lender in Hong Kong gets control a loan provider in Canada

A Hong Kong citizen goes to Malaysia for any occasion trip

A restaurant in Hong Kong buys burgandy or merlot wine from France

A local airfreight service company buys a airplane from the USA

A merchant bank or investment company in Britain receives fee for organizing the sale of bonds of MTRC in Hong Kong

2. (a) What is an exchange rate?

(b) Assume a LCD TV stated in Japan is sold for 1, 200, 000 yen.

(i) What is the money price of the LCD TV if the exchange rate is 100 yen/$?

(ii) What is the dollars price of the TELEVISION if the exchange rate is 120 yen/$?

(iii) As the price of dollar in terms of yen has risen, what goes on to the dollar price of Japanese-produced goods?

(iv) What would you expect to happen to the number of LCD TVs brought in in to the US after the dollar has improved in exchange rate?


1. The following table shows hypothetical data on the total amount of obligations accounts of Country A.

Balance Of Repayments Accounts

HK$ (m)


Long-term capital inflow

1, 400


Exports of goods

18, 500


Freight and delivery receipts

1, 200


Freight and shipping and delivery payments

1, 130


Short-term capital inflow

1, 180


Imports of goods

16, 500


Long-term capital outflow



Short-term capital outflow

1, 050


Interest and dividend receipts



Interest and dividend payments

1, 600


Other travel payments


Distinguish between balance of obvious trade and balance of unseen trade.

What is the worthiness of the total amount of obvious trade? May be the obvious trade balance a deficit or surplus?

What is the value of the total amount of unseen trade? Is the unseen trade balance a deficit or surplus?

What is the total amount on the existing account?

What is the balance on the capital account?

What may happen to the official reserves therefore of these international orders?

2. (a) Distinguish between your fixed and floating exchange rate systems.

(b) Make clear how government authorities can try to keep their exchange rates set under the predetermined exchange rate system.

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