International_Trade_and_Finance

International Trade and Finance After the emergence of world trade organization, the volume of international trade has increased, and countries across the world actively participate in exporting domestic products to other countries. Participating in such trades allow countries to produce specialized products to export and import products from other countries to satisfy their citizens’ needs. In many regards, the United States and Japan are some of the largest competitors in international trade, because both countries produce many of the same products. Toshiba and Dell are fierce competitors in the personal computer market, and thus, in the world trade market. Comparative Advantage In international trade, the role of the comparative advantage is imperative and can be described as the capability of a country, or a company within a country, to manufacture a particular good or service at a lesser cost than that of another country or company. Exchange Rate Risk The exchange rate is defined as the value of one country’s currency in comparison to another country’s currency. The exchange rate affects organizations that export and/or import. When the value of currency increases, the price of a traded commodity decreases. The opposite occurs when the value of currency decreases. The chart below clearly shows this cycle. Price of commodity Investment Exchange rate Demand for Domestic Currency The demand for domestic currency will decrease in the international market when a country faces disturbance internally. This internal disturbance will decrease the domestic production, and in turn, decrease the investment and demand for the currency in the international currency exchange market. This same principle is applied when inflation is high in a trading country, as the currency is worth less. International Trade’s Impact on GDP In terms of macroeconomics, the gross domestic product, known as GDP, is often considered to be the most significant indicator that shows the economic performance of a country. The GDP is the market value of all final goods and services manufactured within a country during a specific time. To find the GDP, the following formula is used: GDP = Consumer + Total Investment + Total Spending by Government + Net Imports Spending by Businesses (Local, State, and Federal) (Exports-Imports) An increase in net exports has a positive effect on the gross domestic product. When the net exports increase, it displays an increasing aggregate demand in the economy. When the net exports decrease, meaning the country’s imports are greater than the country’s exports, the GDP will decrease and ultimately is representative of the country’s economy as a whole. A country that imports more goods than exported shows that the country’s manufacturing capabilities have decreased and this affects its citizens adversely with unemployment rising being a possible direct effect. Lower exports represents a slowing market and, as previously stated, typically results in unemployment rising. This impacts university students directly as newly graduated students have accumulated learning related debt and less opportunities to find careers in their field of study with a weakened market. When the net exports are increased, and the aggregate demand is high, it represents a stronger market with new investments and demand for employment. This type of market is ideal for graduating university students, and also attracts more students to pursue their educational goals. International Trade Barriers Global organizations and countries in general, face a multitude of obstacles when conducting business worldwide and during international trade. Quotas are set maximum quantities of goods or services that can be imported or exported during a specific time period. Quotas force corporations to limit their international trade transactions. Tariffs are taxes the governments impose on companies importing goods or services into their country. This is done to protect the interests of domestic companies producing similar goods or services. Tariffs affect the price of the goods and services that are imported to offset the cost of the tariff charged. Conclusion With the assistance of increasingly advanced transportation, modern production techniques, rapid industrialization, and increasing outsourcing of trade and services, the international trade organization is increasing quickly across the globe. The international trade accounts for a fair share of a country’s gross domestic product. Furthermore, it is a significant foundation of income for both developed and developing countries. Due to the many benefits resulting from international trade, the majority of countries participate in international trade. References EconomyWatch (2010, June 30). Benefits of International Trade. Economy Watch. Retrieved September 10, 2012, from http://www.economywatch.com/international- trade/benefit.html INVESTOPEDIA (NA). Foreign-Exchange Risk. INVESTOPEDIA. Retrieved September 10, 2012, from http://www.investopedia.com/terms/f/foreignexchangerisk.asp#axzz1k7pJpArC Krugman, P.; Wells, R.; (2009), Macroeconomics.Retrieved from Google Books. Ward, J. (NA). Combination of Factors Including Currency Rates Decide Foreign Exchange Rate. Article Click. Retrieved September 10, 2012, from http://www.articleclick.com/Article/Combination-of-Factors-Including-Currency-Rates-Decide-Foreign-Exchange-Rate/1716509