MODULE 5: INTERNATIONAL TRADE AND GLOBALISATION

5.1.1 EXPLAIN SPECIALISATION BY NATION

SPECIALISATION

It refers to the process by which individuals, firms, or nations focus on producing a limited range of
goods or services, thereby becoming more efficient at producing those specific items.

SPECIALISATION BY NATION

It refers to the practice where countries concentrate their production efforts on producing goods and
services in which they have a comparative advantage, allowing for more efficient use of resources.

Examples

 Botswana specializes in beef and diamond

 South Africa is rich in minerals and specializes in mining, particularly gold and platinum.

5.1. 2 DISCUSS SPECIALISATION BY NATION

ADVANTAGES OF SPECIALIZATION BY NATION

 Increased Efficiency: Nations can produce goods and services at a lower cost and with higher
quality when they focus on what they do best, leading to efficient resource allocation
 Economies of Scale: allows countries to produce goods in large quantities, thus reducing the
average cost per unit and increasing competitiveness in international markets.
 Enhanced Trade Opportunities: By producing surplus goods for export, countries can engage
more in international trade, importing goods that other nations produce more efficiently and
fostering global economic ties.
 Higher Productivity: encourages firms to innovate and improve their processes, leading to
technological advancements and productivity gains.
 Job Creation in Specialized Sectors: Concentrating on specific industries can lead to the growth
of specialized job markets and create employment opportunities, often enhancing the skill set of
the workforce.
 Stronger Global Competitiveness: Countries that specialize can position themselves as leaders in
certain industries, enhancing their global economic influence and attracting foreign investment.

DISADVANTAGES OF SPECIALIZATION BY NATION

 Economic Vulnerability: Countries that specialize heavily in a narrow range of products can face
significant economic risks if there are market fluctuations or a decrease in demand for their main
exports, leading to economic instability.
 Job Displacement: As industries decline due to competition or changing market demands,
workers may lose jobs, necessitating retraining and support systems to assist affected workers.

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  Over-Reliance on Specific Markets: Nations might become overly dependent on a few
commodities or industries, making their economies sensitive to changes in global markets or
prices.
 Environmental Concerns: Intensive specialization can lead to over-extraction of natural
resources, environmental degradation, and unsustainable practices if not managed responsibly.
 Trade Imbalances: Countries that focus on low-value exports may struggle with trade
imbalances, importing high-value goods while exporting low-value ones, which could hinder
overall economic growth.

5.2 GLOBALISATION, FREE TRADE AND PROTECTIONISM

5.2.1 EXPLAIN THE TERM GLOBALISATION

The increases in worldwide trade and movement of people and capital between countries.

5.2.2 ASSESS THE EFFECTS OF GLOBALISATION IN THE ECONOMY

ADVANTAGES OF GLOBALIZATION

 Labor Mobility: The movement of people across borders for work can help fill labor shortages in
some countries while providing opportunities for better wages and living conditions for migrants.
 Trade Liberalization: it encourages the reduction of trade barriers, such as tariffs and quotas,
allowing for the free flow of goods and services across borders leading to increased competition,
lower prices, and greater variety for consumers.
 Attracts Foreign Direct Investment (FDI): Companies invest in businesses in other countries,
facilitating the expansion of markets, the transfer of technology, and the creation of jobs.
 Increased Trade: it facilitates trade between nations, opening up markets and allowing countries
to specialize in the production of goods and services where they have a comparative advantage.
 Access to variety of Goods and Services: Consumers benefit from a wider variety of goods and
services at competitive prices due to increased competition and efficiency in production.
 Innovation and Technology Transfer; it encourages the sharing of technology and ideas, leading
to innovation and advancements in various fields, including medicine, agriculture, and
communication.

DISADVANTAGES OF GLOBALIZATION

 Income Inequality: it can lead to greater wealth concentration in certain sectors or regions,
creating income inequality both within and between nations.
 Job Losses in Certain Industries: some industries may suffer due to competition from cheaper
imports or outsourcing, resulting in job losses and economic decline in affected sectors.
 Cultural Homogenization: The dominance of certain cultures (particularly Western culture) can
overshadow local traditions and practices, leading to cultural erosion and a loss of identity.
 Exploitation of Workers: Companies may seek to maximize profits by relocating production to
countries with lower labor standards, potentially leading to exploitation and poor working
conditions.

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  Environmental Degradation: Increased production and consumption can lead to overexploitation
of natural resources, pollution, and greater environmental degradation if not managed
sustainably.

5.2.3EXPLAIN FUNCTIONS OF FREE TRADE ASSOCIATIONS THAT BOTSWANA IS A MEMBER OF

Botswana is a member of several Free Trade Associations

1. Southern African Development Community (SADC)

2. World Trade Organization (WTO)
3. The Southern African Customs Union (SACU)

1. SOUTHERN AFRICAN DEVELOPMENT COMMUNITY (SADC)

Th (SADC) is an inter-governmental organization headquartered in Gaborone, Botswana aiming to

promote regional socio-economic cooperation and integration among 16 countries in southern Africa.

FUNCTIONS

 Trade Liberalization: It aims to reduce and eliminate tariffs and non-tariff barriers among
member states to facilitate easier and cheaper trade.
 Regional Economic Integration: It seeks to establish a free trade area to promote regional
economic development, allowing countries to pool resources and enhance competitiveness.
 Infrastructure Development: it promotes projects that enhance regional connectivity, including
transport and communication networks that are important for trade.
 Coordination of Economic Policies: Member countries coordinate their economic policies
through SADC to enhance trade relations and regional stability.
 Capacity Building: It provides training and assistance to member states in areas like trade
negotiation, customs management, and regulatory frameworks.

2. WORLD TRADE ORGANIZATION (WTO)

WTO is an intergovernmental organization headquartered in Geneva, Switzerland[6] that regulates and

facilitates international trade across the world.[

FUNCTIONS

 Trade Negotiation: engage in negotiations that shape global trade rules, promoting fair and
equitable trade practices.
 Dispute Resolution: provides a platform for the resolution of trade disputes, helping Botswana
protect its trade interests and resolve issues with other member countries.
 Technical Assistance and Capacity Building: offers programs to help developing countries, like
Botswana, enhance their trade capacities and understand global trade rules.
 Monitoring Trade Policies: It conducts regular reviews of trade policies of member countries,
promoting transparency and compliance with international trade commitments.

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3.THE SOUTHERN AFRICAN CUSTOMS UNION (SACU)

It is a customs union comprising five member states: Botswana, Eswatini (Swaziland), Lesotho, Namibia,
and South Africa with an aim to maintain the free interchange of goods between member
countries.

FUNCTIONS

 Elimination of Tariffs and Trade Barriers within the union, thus facilitating smooth and cost-
effective trade among member countries as there is free movement of goods among member
countries without encountering additional tariffs or customs duties after initial entry into any
member state.
 Common External Tariff: The union implements a common external tariff (CET) for imports from
non-member countries, ensuring that all member states apply the same tariffs on imports, which
helps to protect their respective economies while fostering intra-regional trade.
 Customs Revenue Sharing Agreement: it has a revenue-sharing formula that allocates customs
revenue collected from customs duties and tariffs among its members, this ensures that all
member states benefit fairly from their participation in the customs union and helps support the
economies of smaller member states (like Lesotho and Eswatini) that may have limited capacity
to generate their own revenue.
 Conducting Research and Analysis: it conducts research on trade, economic, and policy issues
relevant to the union, providing valuable insights and recommendations to member states.

5.2.4 DISCUSS THE IMPLICATIONS OF FREE TRADE TO COSUMERS, PRODUCERS AND THE ECONOMY

FREE TRADE: A trade policy that allows countries to import and export goods without any tariffs or trade
barriers.

1.IMPLICATIONS OF FREE TRADE TO CONSUMERS

POSITIVE IMPLICATIONS

 Increased Variety of Goods and Services: It allows consumers to access a wider range of
products from different countries, giving them choice and catering to different preferences.
 Lower Prices for goods and services: due to competition from international suppliers enabling
consumers to buy more goods to improve their standard of living.
 Higher Quality goods and services: Competition among producers leads to innovation and
improvement in product quality as companies strive to meet consumer demands and
preferences.

NEGATIVE IMPLICATIONS

 Exposure to Foreign Market Fluctuations: Consumers may be affected by global economic

conditions, leading to price fluctuations based on supply chain disruptions or international
market changes.
 Risk of Job Losses in Certain Sectors: If domestic industries struggle to compete with cheaper
imports, there may be job losses, which can affect consumers who rely on those jobs for income.

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  Quality Concerns: Some imported goods may not meet the same quality or safety standards as
domestically produced products; this could expose consumers to inferior products that may not
have been manufactured under strict regulations

2. IMPLICATIONS OF FREE TRADE FOR PRODUCERS

POSITIVE IMPLICATIONS

 Access to Larger Markets: it expands producers' markets beyond domestic borders, this access
allows businesses to grow and scale their operations increasing profitability.
 Increased Efficiency and Competitiveness: Exposure to international competition compels
producers to innovate and improve operational efficiency, potentially leading to better products
and services that attracts more customers.
 Lower Input Costs: Producers can source raw materials and components from cheaper
international suppliers, reducing production costs and potentially increasing profit margins.

NEGATIVE IMPLICATIONS

 Increased Competition: Domestic producers may face intense competition from international
firms that can produce goods at lower prices, which could lead to losses or business closures.
 Dependence on global supply chains may affect production processes and profitability in case
there are disruptions due to political issues and natural disasters.
 Pressure on Wages and Working Conditions: In an attempt to remain competitive, some
producers might cut costs by reducing wages or compromising working conditions.

3. IMPLICATIONS OF FREE TRADE FOR THE ECONOMY

POSITIVE IMPLICATIONS

 Contributes to Economic Growth by increasing exports and creating jobs, which stimulates
national income and consumption.
 Increased Foreign Investment [FDI]: which can enhance local infrastructure, technology
transfer, and create employment opportunities.
 Global Resource Allocation: promotes the allocation of resources to their most efficient uses,
whereby countries specialize in producing goods and services where they have a comparative
advantage, leading to greater overall production and wealth generation.

NEGATIVE IMPLICATIONS

 trade Imbalances: If a country imports more than it exports, lead to trade deficits, potentially
straining national finances and currency value.
 Economic Disruption: Rapid changes in trade policies or the influx of imports can disrupt local
economies, affecting industries that face foreign competition.
 Environmental Concerns: Increased production and consumption through free trade may lead to
environmental degradation, pollution and resource depletion.

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 5.2.5 EXPLAIN REASONS FOR TRADE PROTECTION

TRADE PROTECTION

Refers to the policies and measures that governments implement to protect local industries from foreign
competition.

These measures are designed to encourage local production, preserve jobs, and enhance national
security.

REASONS FOR TRADE PROTECTION

 Protecting local Industries; Newly established industries may struggle to compete with
established foreign companies so this can provide these "infant" industries the time and space
needed to grow and develop their competitive edge.
 Job Protection: helps protect jobs in domestic industries that might otherwise be threatened by
international competition.
 Balancing Trade Deficits: Countries facing trade deficits may employ protectionist measures to
reduce imports and encourage domestic consumption of locally produced goods, thereby
improving their balance of trade.
 Preventing Dumping: Governments may use it to counteract dumping, a practice where foreign
companies sell goods at below-market prices to gain market share, this can harm local
businesses that cannot compete with low prices.
 Trade Relations and Negotiation Leverage: Countries might impose trade barriers as a
bargaining tool in international negotiations, utilizing such measures to push for better trade
terms or concessions from other nations.

5.2.6 EXPLAIN THE METHODS OF TRADE PROTECTION

 Tariffs: Are taxes imposed on imported goods, this makes imports expensive and local produced
goods more competitive, thereby encouraging local consumption.
 Quotas: Are limits set on the quantity of a specific good that can be imported during a given
time period. By restricting the supply of foreign products, it can help stabilize domestic prices
and encourage local production.
 Subsidies: Are financial assistance provided by the government to local businesses to reduce
their costs and make them more competitive against imports.
 Embargo: This is a total ban on certain imports, done to stop harmful products or to empower
local producers.
 Import Licenses: Import licensing requires importers to obtain permission from the government
before bringing certain goods into the country, this can limit the flow of foreign goods and
protect domestic industries.

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 5.2.7 EVALUATE THE EFFECTS OF TRADE PROTECTION ON THE BUSINESS

POSITIVE EFFECTS

 Increased competitiveness of domestic firms: can help local businesses by protecting them
from foreign competition, with reduced import competition, they may gain market share/
increase sales, and enhance profitability.
 Job Preservation: Protecting domestic industries can help preserve jobs that might be
threatened by cheaper imports
 Incentives for Local Investment: Trade protections may encourage businesses to invest in
domestic production capabilities, resulting in improved infrastructure, technology, and
workforce development.
 Fosters Innovation: With less competitive pressure from imports, domestic firms may have more
resources and time to invest in research and development, potentially leading to innovation and
improved products.

NEGATIVE EFFECTS

 Retaliation and trade wars: Other countries may respond to trade protection with their own
tariffs or barriers, which can lead to trade wars, such retaliatory measures can harm not only the
industries directly targeted but also other sectors that rely on international trade.
 Expensive importation of raw materials: Local companies that rely on imports for raw materials
or components may face increased costs, making it challenging to compete in foreign markets.
 Increased Administrative Burden: Compliance with trade protection measures, such as tariffs
and quotas, can add administrative costs and complexity for businesses, particularly for those
involved in international trade.
 Inefficiency: local businesses may reduce their incentive to innovate or improve efficiency due to
lack of foreign competition, this can result in a lack of competitiveness in the long term.


5.3 BALANCE OF PAYMENTS

5.3.1 EXPALIN THE BALANCE OF TRADE AND CALCULATE IT

BALANCE OF TRADE: It is the difference between the amount a country earns from exporting goods and
what it spends on importing goods over a specific period.

 It primarily focuses on the trading of goods and services.

Balance of trade = visible exports – visible imports

 If the value of goods imported/visible imports exceed the value of goods exported, a country
is said to have an unfavorable balance of trade/Trade deficit
 If the value of exported goods exceeds the value of imported goods, the country would have a
favorable balance of trade/ trade surplus.

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 5.3.3 EXPLAIN BALANCE OF PAYMENTS

THE BALANCE OF PAYMENT: it is the difference between total exports and total imports over a year. It
includes the

 Visible items
 Invisible items
 Capital items

Balance of Payment= total visible and – total visible and + capital items
invisible items invisible items
OR
= total exported goods - total imported goods + capital items
and services and services

The balance of payment is divided into two sections:

 current account
 Capital account.

5.3.4 STATE THE COMPONENTS OF CURRENT ACCOUNT AND THE CAPITAL ACCOUNT

1. CURRENT ACCOUNT: This account records transactions that involve the export or import of
goods and services. It therefore shows the trade in visible exports and imports as well as
invisible exports and imports.

Current balance = total visible & invisible exports – total visible & invisible imports

OR

Total exports of goods & services – total imports of goods &services

NB:

 Visible items refer to trade in physical goods that can be touched, seen measured or
weighed such as furniture, cars, clothes, food, building materials, etc.

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  The invisible items refer to trade in services, that cannot be seen touched, measured,
weighed etc.
EG. Invisible exports: tourists coming to Botswana

Foreign students studying in Botswana

Invisible imports: sending Batswana students abroad for study

Botswana using other countries ships when transporting beef to Europe

2. THE CAPITAL ACCOUNT: it shows the amount of money coming in from other countries (capital
inflow/receipts) and the amount of money going out of the country (capital outflow/payments)

E.G

 Loans received from abroad (from individuals, foreign governments and foreign companies)
 Lending made abroad by Botswana and the Botswana government.
 Investments made abroad by Botswana and Botswana government
 Investments made in Botswana by foreign companies and individuals.

Capital Account Balance = Total capital receipts - total capital payments

- **Components**:

1. **Current Account**: This includes the balance of trade (goods and services), net income from
abroad (such as interest and dividends), and net transfers (like remittances).

- Formula:

\text{Current Account} = \text{Balance of Trade} + \text{Net Income} + \text{Net Transfers}

2. **Capital Account**: This records transactions that involve the purchase/sale of assets, investments,
and loans.

**Example Calculation**:

Suppose the current account shows:

- Balance of Trade: $-100 billion (deficit)

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- Net Income: $30 billion

- Net Transfers: $20 billion

\text{Current Account} = -100 + 30 + 20 = -50 \text{ billion}

Suppose the capital account shows a surplus of $25 billion and the financial account shows a surplus of
$10 billion.

\text{BOP} = (-50) + 25 + 10 = -15 \text{ billion}

This indicates that the overall balance of payments for that period is a deficit of $15 billion.

### COMPONENTS OF THE CURRENT ACCOUNT

The current account primarily includes three main components:

1. **Balance of Trade**:

- The difference between the value of exports and imports of goods and services.

- Formula: \( \text{Balance of Trade} = \text{Total Exports} - \text{Total Imports} \)

2. **Net Income from Abroad**:

- This includes income earned from foreign investments (such as dividends and interest) minus
payments made to foreign investors.

- Formula: \( \text{Net Income} = \text{Income Earned from Investments} - \text{Payments to Foreign

Investors} \)

3. **Net Transfers**:

- This includes money transfers, remittances, and any foreign aid received minus the payments made as
gifts or aid given to other countries.

- Formula: \( \text{Net Transfers} = \text{Transfers Received} - \text{Transfers Sent} \)

**Overall Current Account Balance**:

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\text{Current Account} = \text{Balance of Trade} + \text{Net Income} + \text{Net Transfers}

### Components of the Capital Account

The capital account primarily records the financial transactions related to investment assets and
liabilities. Its key components are:

1. **Capital Transfers**:

- This includes transactions where assets are transferred between countries without any compensation,
such as debt forgiveness or the purchase of land.

2. **Acquisition or Disposal of Non-Produced, Non-Financial Assets**:

- This involves the sale or purchase of non-financial assets, such as patents or trademarks.

#### Current Account

Total Exports of Goods and Services: $600 billion

- Total Imports of Goods and Services: $800 billion

- Income Earned from Foreign Investments: $50 billion

- Payments to Foreign Investors: $30 billion

- Transfers Received (including remittances): $20 billion

- Transfers Sent: $10 billion

**1. Calculate Balance of Trade**:

\text{Balance of Trade} = 600 - 800 = -200 \text{ billion}

\] (trade deficit)

**2. Calculate Net Income from Abroad**:

\[

\text{Net Income} = 50 - 30 = 20 \text{ billion}

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**3. Calculate Net Transfers**:

\text{Net Transfers} = 20 - 10 = 10 \text{ billion}

**4. Calculate Overall Current Account Balance**:

\text{Current Account} = -200 + 20 + 10 = -170 \text{ billion}

\] (current account deficit)

#### Capital Account

For the hypothetical capital account data:

- Capital Transfers (debt forgiveness, etc.): $5 billion

- Acquisition of Non-Produced Assets: $2 billion

- Disposal of Non-Produced Assets: $1 billion

**1. Calculate Total Capital Transfers**:

Assuming capital transfers are the summation of acquisitions and disposals:

In conclusion, the current account reflects the net flow of goods, services, income, and transfers, while
the capital account reflects changes in ownership of assets. Monitoring these balances helps to provide
insights into a country’s economic health and international competitiveness.

IMPLICATIONS OF FAVOURABLE AND UNFAVOURABLE BALANCE OF PAYMENT

FAVOURABLE BALANCE OF BALANCE UNFAVOURABLE BALANCE OF PAYMENT

 The country can afford to implement  The country becomes a net borrower [1]
development projects such as building therefore have financial difficulties [1]

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 schools/ hospitals [1] hence improved
standard of living for its citizens [1]
 Development projects will be delayed,
postponed or even cancelled [1] hence poor
 The country makes savings in the form standard of living for the citizens [1]
of foreign exchange reserves[1]that
can help to pay for imports/ help in
time of drought/floods/ war [1]  The country will spend and exhausts its
savings/foreign exchange reserves [1] no
money to guard against difficulty times like
war/floods/drought [1]

 Loss of foreign exchange [1] therefore no

money to pay for imports [1]

 Inflation [1] which may be a problem to

citizens as they may not afford to buy goods
and services[1] hence poor standard of
living [1]

NB: favorable balance of payment occurs when the value of total exports is greater than total
imports, this means the country has earned more than it spent.

Unfavorable balance of payment occurs when the total value of imports is greater than total
exports this means the country spends more than what it earns.

5.3.7 EXPLAIN THE CAUSES OF FAVORABLE BALANCE OF PAYMENTS

FAVORABLE BALANCE OF PAYMENTS occurs when a country has a surplus in its BOP, meaning it exports
more than it imports over a certain period.

 Strong Export Performance: Countries with competitive industries may experience higher
demand for their goods and services abroad, leading to increased export revenues.
 Weak Domestic Demand: A slowdown in domestic consumption can result in less spending on
imports, particularly during economic downturns, thus reducing import bills.
 High Foreign Investment: An influx of foreign direct investment (FDI) can lead to financial
inflows, contributing positively to the capital and financial account
 Strong Currency: A strong local currency can make imports cheaper, which can help improve the
balance of payments if exports are still robust.
 Remittances: High levels of remittances from citizens working abroad can improve the current
account balance, positively impacting the BOP overall.
 Tourism Revenues: A thriving tourism sector, attracting international visitors, can increase
foreign currency inflows, contributing to a favorable balance.

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5.3.7 EXPLAIN CAUSES OF UNFAVORABLE BALANCE OF PAYMENTS

AN UNFAVORABLE BALANCE OF PAYMENTS occurs when a country experiences a deficit, meaning it

imports more than it exports.

 High Import demand: Growing local consumption, especially of foreign goods, can increase
imports, leading to a larger trade deficit.
 Declining Exports due to loss of competitiveness, poor product quality, or declining global
demand, can negatively impact the balance of payments.
 Currency Depreciation: can make imports more expensive, increasing spending on foreign goods
and increasing the trade deficit.
 High External Debt: lead to capital outflows due to interest payments and principal repayments,
negatively affecting the capital account.
 Political Instability: Issues such as political unrest, regime changes, or unfavorable policies can
deter foreign investment, impacting the capital account negatively and leading to a BOP deficit.
 Global recessions or downturns can reduce demand for exports and lead to increased imports of
essential goods, worsening the balance of payments.

5.3.8 EVALUATE FAVOURABLE AND UNFAVOURABLE BALANCE OF PAYMENTS

Benefits:

 Economic Growth: Surpluses can lead to stronger economic growth, as excess funds can be
reinvested in domestic businesses or infrastructure, contributing to further expansion.
 Strengthening of Currency: A surplus often leads to an appreciation of the domestic currency,
making imports cheaper and potentially aiding consumers and businesses that rely on foreign
goods.
 Increased Foreign Reserves: A favorable BOP increases a country’s foreign exchange reserves,
providing a buffer against external shocks and enhancing the ability to influence exchange rates
and trade policy
 Investment in Development: Governments can use surplus funds for investments in social
programs, education, and healthcare, improving overall quality of life.
 Low External Debt Pressure: A surplus reduces reliance on foreign borrowing, potentially leading
to lower debt levels and interest rates, which is beneficial for economic stability.

# Drawbacks:

 Overdependence on External Markets: A reliance on exports can leave a country vulnerable to

global demand fluctuations. Economic downturns in key markets can severely impact domestic
industry.
 Trade Tensions: If a country consistently runs trade surpluses, it might face retaliatory measures
or tariffs from trade partners who perceive it as a threat to their domestic industries.
 Resource Misallocation: A focus on exporting certain goods may lead to underinvestment in
other important sectors of the economy that may need development or diversification.

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UNFAVORABLE BALANCE OF PAYMENTS

#### Characteristics:

An unfavorable balance of payments indicates that a country imports more than it exports, resulting in a
deficit. This situation can be indicative of various economic challenges.

#### Benefits:

 Access to Goods and Services: A trade deficit may allow consumers and businesses to access a
wider range of goods and services at lower prices, improving consumer welfare.
 Encouragement of Foreign Direct Investment:High levels of imports may attract foreign
investment in local industries, particularly if investors see potential for growth in the domestic
market.
 Economic Development Opportunities: A deficit could indicate that a country is investing heavily
in infrastructure or development projects using borrowed or foreign funds, which may lead to
future growth.

#### Drawbacks:

 Increased Debt and Financial Vulnerability**:Persistent deficits can lead to rising national debt
levels and increased vulnerability to external shocks. Countries may rely on borrowing to finance
their deficits, leading to higher interest payments.
 Currency Depreciation**:A sustained unfavorable BOP can result in depreciation of the domestic
currency, making imports more expensive and potentially leading to inflationary pressures.
 Reduced Economic Stability**:An unfavorable balance of payments can indicate economic
imbalances, undermining investor confidence and leading to reduced investment and economic
instability.
 Trade Barriers and Retaliation**: Countries with significant trade deficits may adopt protectionist
measures, leading to economic isolation and tensions with trading partners.
 Impact on Domestic Growth: High levels of imports can hinder domestic industries’ growth, as
they may struggle to compete against cheaper foreign products, leading to potential job losses
and reduced innovation.

5.3.9: RECOMMEND POSSIBLE SOLUTIONS TO ADDRESS/SOLVE BALANCE OF PAYMENT PROBLEMS

Solutions for Unfavorable Balance of Payments

 Devalue the local currency (the pula) [1]:this will make exports cheaper for other countries to
buy / imports will be expensive for us therefore this will reduce the number of imports [1] but
this may lead to citizens to have less choice when buying goods [1]
 Impose import quotas: this will restrict the amount of goods to be imported and hence the
country will spend less to pay for imports. [1] but this may lead to shortage of essential imports.

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  Impose tariffs or customs duty: It will make imports more expensive to buy than local produced
goods leading to a decrease in imports. [1] but some countries may retaliate by imposing quotas
too [1]
 Increase interest rates: In order to cause a fall in spending and hence a fall in imports.
 Stimulate exports by providing subsides [1] therefore exporters will be able to charge
competitive prices leading to attraction of large share of the foreign market [1]
 Ban the importation of some goods which are not so important [1] this will help reduce
imports [1] but may encourage smuggling of goods into the country [1]
 Loans from IMF/WORLD BANK
 Use the country’s reserves
 grants, or incentives for businesses engaged in export activities to encourage domestic
production for international markets.

5.4 EXCHANGE RATE SYSTEMS

5.4.1 EXPLAIN EXCHANGE RATES

Exchange rates are the values at which one currency can be exchanged for another.

5.4.2 DIFFERENTIATE BETWEEN FLOATING AND FIXED EXCHANGE RATE

FLOATING FIXED RATE FIXED EXCHANGE RATE

rate is determined by the market forces of supply is one where a country's currency value is tied or
and demand relative to other currencies pegged to another major currency (like the U.S.
dollar or gold) or a basket of currencies. The
central bank maintains this rate through market
intervention and monetary policy
It fluctuates freely and can change frequently government or central bank sets and maintains
based on various economic factors, such as the fixed rate, i
interest rates, inflation, political stability, and
overall economic performance.
The value of the currency is dictated by trading in
the foreign exchange market, where currency
values move in response to changes in demand
and supply
rates can be highly volatile, which may lead to provide greater stability and predictability for
uncertainty for businesses engaged in trade and investment as businesses can plan
international trade and investment based on the stable exchange rate

### Summary of Differences

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| Feature | Floating Exchange Rates | Fixed Exchange Rates |

|----------------------------|---------------------------------|--------------------------------|

| **Determination** | Market-driven | Government/central bank set |

| **Volatility** | Variable, often volatile | Stable, generally low |

| **Automatic Adjustment** | Yes, through market forces | Limited, may require intervention|

| **Predictability** | Less predictable | More predictable |

| **Currency Reserves Needed**| Less needed | High reserves required |

| **Risk of Crisis** | Volatility can lead to crises | Crises can occur if the peg fails|

| **Inflation Control** | More susceptible to inflation | Can help control inflation |

EXCHANGE RATE FLUCTUATIONS refer to the changes in the value of one currency relative to another
over time.

5.4.5 EXPLAIN CAUSES OF EXCHANGE RATE FLUCTUATIONS

 Interest Rates: Higher interest rates offer lenders a higher return relative to other countries,
attracting foreign capital and causing the currency to appreciate, when a country lowers its
interest rates, it may lead to capital outflows as investors seek higher returns elsewhere, causing
the currency to depreciate.

 Inflation Rates: A lower inflation rate in a country compared to its trading partners will increase
its currency's value. Higher inflation erodes purchasing power, decreasing demand for that
currency as foreign goods become costlier. This situation can lead to depreciation.

 Economic Indicators: Positive economic indicators may boost investor confidence and attract
foreign investments, leading to currency appreciation. Conversely, negative indicators can
prompt currency depreciation.

 Political Stability and Economic Performance: Countries with stable governments and sound
economic policies are more attractive to foreign investors, positively impacting their currency
value. Political instability, conflict, or poor governance can lead to uncertainty, reducing foreign
investment and causing the currency to depreciate.

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  Trade Balances: A consistent trade surplus strengthens the currency as foreign buyers need to
purchase the domestic currency to pay for goods, while a trade deficit leads to depreciation due
to lower demand for the currency.

 Central Bank Actions and Monetary Policy: If a central bank raises interest rates or undertakes
measures to increase the value of its currency, it can lead to appreciation. Conversely,
expansionary policies (lowering rates or quantitative easing) can lead to depreciation.

 Government Debt: High levels of public debt can lead to inflation and default risks, discouraging
foreign investment. A country with excessive debt may be viewed as risky, leading to
depreciation of its currency as investors seek safer alternatives.

5.4.5 DISCUSS THE EFFECTS OF EXCHANGE RATE FLUCTUATIONS ON IMPORTERS AND EXPORTES

Effects on Exporters

 Profitability:

- **Appreciation of Local Currency**: If a country's currency appreciates relative to foreign currencies,

exported goods become more expensive for foreign buyers. This can lead to lower demand for exports,
potentially reducing revenue and profits for exporters.

- **Depreciation of Local Currency**: Conversely, if the local currency depreciates, exports become
cheaper and more attractive to foreign buyers, often leading to increased sales and higher profits.

 Pricing Strategies**:

- Exporters may need to adjust their pricing strategies based on exchange rate fluctuations. If the local
currency strengthens, exporters might need to lower prices in foreign markets to maintain
competitiveness. If it weakens, they might have the opportunity to increase prices.

 Contract Obligations**:

- Export contracts may be set in foreign currencies. Fluctuations can affect the amount received when
converting foreign currency sales back to the local currency, impacting cash flow and planning.

 Market Access**:

- Exchange rate stability can enhance predictability for exporters, making it easier to plan and allocate
resources. Volatile exchange rates, on the other hand, create uncertainty, which can deter exporters
from entering certain markets.

EFFECTS ON IMPORTERS

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1. **Cost of Goods**:

 When the local currency appreciates, imports become cheaper. Importers can save on costs,
improving profit margins. This is particularly beneficial for those relying heavily on foreign goods.
However a depreciation leads to more expensive imports, raising costs for importers. This can
squeeze profit margins and potentially lead to higher prices for consumers.

2. **Budgeting and Planning**:

- Exchange rate fluctuations can complicate budgeting and financial planning for importers. Sudden
changes can impact the total cost of imported goods and affect overall cash flow.

3. **Hedging Strategies**:

- Importers may resort to hedging against currency fluctuations through financial instruments (like
forward contracts) to mitigate risks. This can help ensure that costs remain predictable.

4. **Supply Chain Decisions**:

- Fluctuations in exchange rates can influence supply chain decisions. For instance, importers may seek
suppliers from countries with currencies that are favorable compared to their own to minimize costs.

5.4.4 CONVERT ONE CURRENCY TO ANOTHER

1. **Determine the Exchange Rate**:

- Assume you want to convert U.S. dollars (USD) to euros (EUR). If the exchange rate is \( 1 \, \text{USD}
= 0.85 \, \text{EUR} \).

2. **Choose the Amount to Convert**:

- Let's say you want to convert $100 USD to EUR.

3. **Perform the Conversion**:

- Use the exchange rate to calculate the equivalent amount in euros:

\text{Amount in EUR} = \text{Amount in USD} \times \text{Exchange Rate}

\text{Amount in EUR} = 100 \times 0.85 = 85 \, \text{EUR}

So, $100 USD would be equivalent to €85 at the exchange rate of \( 1 \, \text{USD} = 0.85 \, \text{EUR}

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