Question 1
The balance of payment is defined as the way in which countries use to monitor all financial and monetary transactions within a specified period. The balance of payment is conducted in each country on a quarterly and annual basis. Ideally, the balance of payment is supposed to be zero for a country indicating identical assets and liabilities. However, this is rarely the case since a country may end up borrowing more than it can pay and is thus said to be in deficit or a country could have more than what it owes and is thus termed as being in surplus (Hanson & Zott, 2013). Balance of payment is divided into three accounts: the current account, the financial account, and the capital account. All these different categories deal with a different type of international economic trade.
The current account is used to highlight the inflow and outflow of goods and services into a country within the specified time. This account also includes the earnings gained in investments regardless of whether the investment is public or private. The combination of goods and services make up the balance of trade of the country, which accounts for the majority of the country’s balance of payment. The capital account refers to the international transfer of capital is recorded. Capital relates to all non-financial, non-produced assets. Finally, in the financial account, international money flow is monitored. The flow includes investments in business, stocks, bonds, and real estate (Hanson & Zott, 2013).
Question 2
When the net production of a country is more than its national spending, the country is said to have surplus in the country's current account. If a country is in surplus, it is able to give out credit to other countries and thus is a principle creditor and can help other nations' economies. When savings are greater than investments, it does not necessarily indicate a healthy economy. Savings that are not put into an actionable money generating investment does not help grow the economy. However, in both cases, the country is at an advantage for having a surplus current account.
In the situation where the current account is in surplus, the country is a creditor to other nations since it can give its surplus as an export. Deficit however is an indicative of government and a nation whose economy is a debtor to the rest of the world, this country is investing more than it is saving and is using imported resources to meet its production needs.
Question 3
Most unions in developed nations are against the importation of goods from low-wage countries since they pose a direct threat to the employment of their members. Imports from low-wage countries such as Asian and African countries provide a cheaper alternative to consumers in these nations. This situation is termed unfair competition by local companies in the developed nations since they are at risk of losing business since the higher wage bills they pay cannot compete with the low prices of the imported goods. Unions, therefore, oppose importation from low wage countries to protect the jobs of its union members who are the ones in direct danger.
Question 4
The world’s poorest countries are at a disadvantage when it comes to free trade. Competition under free trade is unfair to smaller less developed countries since they do not have the resources to compete with much richer countries. Under free trade, gains are unfairly distributed favoring the most developed nations, so the poorer countries get scraps of the benefits of the trade. For a country that is poor, free trade policies do not protect them from unfavorable payment system which leans toward greater gains for the developed countries. With all these disadvantages facing smaller economies, poor countries run the risk of losing economic and political independence to much richer countries. Free trade in general supports the notion of making the rich richer and the poorer become worse off (Abel & Bernanke, 2001).
Question 5
In the long run, the greater good will lead to the belief that the interests of the consumers should be put ahead of those of producers in government trade policies. The situation, however, is not so, many times the producers are the ones who have more at stake and more resources to influence policies. Favoring customers over producers may, however, expose the economy to unfavorable competition from cheaper markets but it assumed that it is the work of the government to provide infrastructure for better jobs to the people.
Question 6
Strategic trade policy involves policies that affect the results of interactions between companies in an oligopoly. The idea is to increase domestic welfare by directing money from foreign trade to local firms. The new trade policy, however, focuses on increasing the return to scale and effects of a network. This system involves protection of small businesses in the industry to encourage its expansion. Companies should pressure the government to adopt the strategic policy since it will ensure growth and dominance of local industries and avoids the possibility of multiple governments interaction in international trade. The new trade theory supports local traders and businesses to ensure growth and an increase in production.
References
Abel, A. B., & Bernanke, B. (2001). Macroeconomics. Boston: Addison-Wesley.
Hanson, A. A., & Zott, L. M. (2013). Free trade. Detroit: Greenhaven Press.
