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Economics Keypoints: International Trade

Economics Keypoints: International Trade; This study material is suitable for students sitting for the following exams: JAMB, WAEC, NECO, GCE, IJMB, and JUPEB. International trade refers to the exchange of goods, services, and capital between different countries.

It plays a pivotal role in the global economy, allowing nations to specialize in producing goods and services where they have a comparative advantage and trade them with others for products they cannot efficiently produce.

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Understanding the principles and mechanisms of international trade is crucial for analyzing the economic relationships between countries and their impacts on national economies.

Economics Keypoints: International Trade

a. Meaning and Basis for International Trade

i. Examine the basis for international trade:

The basis for international trade lies in the concept of comparative advantage and specialization. Nations engage in trade to benefit from differences in their resources, technology, and skills. By specializing in the production of goods or services where they have a comparative advantage (producing at a lower opportunity cost), countries can trade these goods for items they cannot efficiently produce domestically. This trade allows for increased efficiency, economic growth, and higher standards of living.

b. Balance of Trade and Balance of Payments

ii. Differentiate between absolute and comparative advantages:

  • Absolute Advantage: A country has an absolute advantage in producing a good or service if it can produce more of it with fewer resources compared to another country. It focuses on the ability to produce goods more efficiently.
  • Comparative Advantage: This concept refers to a country’s ability to produce a good at a lower opportunity cost compared to another country. It’s not about producing more but producing at a lower opportunity cost, allowing for mutually beneficial trade even if one country is more efficient in producing all goods.

iii. Distinguish between balance of trade and balance of payments and their corrective measures:

  • Balance of Trade: It’s the difference between the value of a country’s exports and imports of goods only. A trade surplus occurs when exports exceed imports, while a trade deficit occurs when imports exceed exports.
  • Balance of Payments: It includes not just goods but also services, investment, and financial transactions. It’s divided into the current account (trade in goods and services) and capital account (financial transactions). Corrective measures involve adjustments in fiscal policy, monetary policy, currency devaluation, and promoting exports to rectify deficits.

c. Composition and Direction of Nigeria’s Foreign Trade

v. Examine the composition and direction of Nigeria’s foreign trade:

Nigeria’s foreign trade predominantly involves crude oil exports, which form a significant portion of its total export earnings. The country imports various goods such as machinery, electronics, and refined petroleum products. Nigeria’s major trading partners include China, India, the United States, and the European Union.

d. Exchange Rate: Meaning, Types, and Determination

vi. Identify the types of exchange rates:

  • Fixed Exchange Rate: A rate set and maintained by a government or central bank.
  • Floating Exchange Rate: Determined by supply and demand in the foreign exchange market without government intervention.
  • Managed Floating Rate: A mix of fixed and floating systems where governments intervene occasionally to influence the exchange rate.

vii. Examine how exchange rates are determined:

Exchange rates are determined by various factors like interest rates, inflation, economic performance, geopolitical events, supply and demand for currencies, and government policies. For instance, if a country has higher inflation than its trading partners, its currency may depreciate relative to others.

By understanding these facets of international trade, economies can formulate policies to enhance trade relationships, address trade imbalances, and foster economic growth.

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