International Trade and Exchange Rates

What is international trade? 

International trade relates to the process of a business or country buying and selling products to and from other countries. This is often referred to as importing and exporting. 

Imports – buying goods and services from overseas. 

For example, the UK commonly imports electrical products from China and India. A similar principle applies to the service industries. For example, the call centres of many UK companies are located in India due to the cheaper labour costs in that country. 

Exports – selling goods and services to overseas markets. 

For example, One of the UK’s biggest exports is vehicles. Vehicles made by some of the biggest car brands are produced in the UK and then shipped abroad in return for money. 

International trade specifically: 

• Allows countries to obtain goods that cannot be produced domestically. 
• Allows countries to obtain goods that can be bought more cheaply from overseas. 
• Helps to improve consumer choice 
• Provides opportunities for countries to sell off surplus commodities. 

Surplus– amount of something that is more than what is needed. 

Visible and Invisible Trade 

Visible Trade 

Visible trade involves trading of goods which can be touched and weighed. Examples include trade in goods such as Oil, machinery, food, clothes etc. 

Visible Trade consists of 

Visible exports: Selling of tangible goods which can be touched and weighed to other countries. Visible imports: Buying of tangible goods which can be touched and weighed from other countries. 

Invisible trade 

Invisible trade involves the import and export of services rather than goods. Examples include services such as insurance, banking, tourism, education. 

Balance of trade 

It is the difference between the value of visible exports and the value of visible imports of a country. 

What is an Exchange Rate? 

The exchange rate is the price of one currency expressed in terms of another currency. For example, £1.00 = €1.13 or £1 = US $1.20. The value of a currency is determined by supply and demand. 

When countries use different currencies, transactions between people and firms in different countries are affected.

Question 

The price of an item on a US website is US $25.00. If the exchange rate is £1.00 = US $1.25, what would the price be in pound sterling? 

The Impact of Changes in the exchange rate on importers and exporters 

If the value of the pound increases, more foreign currency can be purchased for the same number of pounds. For example, if the value of the pound changes from £1 = US $1.20 to £1 = US $1.25 then £100 would now convert to US $125 instead of US $120. This is known as an appreciation in the value of the pound. 

A depreciation in the value of the pound, e.g. from £1.00 = US $1.20 to £1.00 = US $1.10, would mean that less foreign currency can be obtained for the same amount of domestic currency. So, the pound has become weaker. 

Changes in exchange rates can have a significant impact on the economy. A UK business that exports products will benefit from a fall in the value of the pound. Overseas firms will receive more UK pounds for their money, so they will pay less for the UK’s products. However, UK firms that import raw materials will have to spend more pounds to obtain the same foreign currency, so they will pay more for those raw materials. 

International Competitiveness and Exchange Rates 

The price of UK exports and imports is affected by changes in the exchange rate. 

• An increase in the value of sterling means one pound buys more dollars. The pound has appreciated (gone up) in value and become stronger. 
• A fall in the value of sterling means one pound buys fewer dollars. This means the pound has depreciated (fallen) in value and become weaker. 

UK exporters benefit from a fall in the value of sterling. However British firms importing raw materials, components or foreign-made goods face higher costs and must either put up their prices or reduce their profit margin. 

Vocabulary 

Commision – extra amount of money that paid to a person or organisation according to the value of the goods they have sod or the services they have provided