International Trade

International trade refers to the exchange of goods, services, and capital across international borders
or territories. It allows countries to expand their markets for both goods and services that otherwise
may not have been available domestically. This is important for economic growth, as it enables
countries to specialize in the production of goods and services in which they have a comparative
advantage and then trade with other countries to obtain other needed goods.

Key Concepts in International Trade:

1. Exports and Imports:

o Exports are goods and services sold by a country to other nations.
o Imports are goods and services bought by a country from other nations.
2. Balance of Trade:
o The difference between a country’s exports and imports. A positive balance (surplus)
occurs when a country exports more than it imports, while a negative balance (deficit)
happens when it imports more than it exports.
3. Trade Agreements:
o Countries often enter into trade agreements like Free Trade Agreements (FTAs) or
regional pacts like the European Union (EU) or North American Free Trade
Agreement (NAFTA), which reduce tariffs and other trade barriers to facilitate trade.
4. Tariffs and Quotas:
o Tariffs are taxes imposed on imported goods to make them more expensive and
protect domestic industries.
o Quotas limit the quantity of a particular good that can be imported into a country.
5. Comparative Advantage:
o This theory suggests that countries should specialize in the production of goods for
which they have the lowest opportunity cost, trading for goods they are less efficient
at producing.
6. Protectionism vs. Free Trade:
o Protectionism involves government actions and policies that restrict international
trade to protect domestic industries, such as tariffs, quotas, and subsidies.
o Free trade advocates for the reduction or elimination of barriers to trade between
countries.
7. World Trade Organization (WTO):
o The WTO is an international organization that regulates trade between nations,
ensuring that trade flows as smoothly, predictably, and freely as possible.
8. Exchange Rates:
o Exchange rates between currencies affect international trade by influencing the price
competitiveness of a country's goods and services in global markets.
9. Trade Deficits and Surpluses:
o A trade deficit occurs when a country imports more than it exports, while a trade
surplus is when a country exports more than it imports.

Benefits of International Trade:

 Access to a wider variety of goods and services.

 Increases efficiency through comparative advantage.
 Promotes innovation and competition.
 Drives economic growth by opening new markets for businesses.

Challenges of International Trade:

 Trade imbalances can lead to deficits.

 Over-reliance on foreign markets can expose countries to economic instability.
 Can harm domestic industries that can't compete with cheaper or higher-quality foreign
products.

International trade is a vital component of the global economy, driving growth, creating jobs, and
fostering international cooperation.

# Bank authority permit only home currency to doing business.

LC or Letter of Credit
A Letter of Credit (LC) is a financial instrument issued by a bank that guarantees a buyer's payment
to a seller will be received on time and for the correct amount. In international trade, where the buyer
and seller may be in different countries and may not have a well-established business relationship, an
LC helps build trust by ensuring that the seller will get paid once the conditions specified in the LC
are fulfilled.
crawling peg
A crawling peg is a system of exchange rate adjustments in which a currency with a fixed exchange
rate is allowed to fluctuate within a band of rates. The par value of the stated currency and the band
of rates may also be adjusted frequently, particularly in times of high exchange rate volatility.
Exchange rate systems
Exchange rate systems describe the methods by which a country’s currency value is determined
relative to other currencies. Here is an explanation of the main types of exchange rate systems:
1. Fixed Exchange Rate System:
 Definition: In a fixed exchange rate system, a country's currency is pegged to another major
currency (such as the U.S. dollar or the Euro) or to a basket of currencies at a specific value.
 Mechanism: The government or central bank intervenes by buying and selling foreign
currency to maintain the exchange rate at its fixed value.
 Examples: Hong Kong pegs its dollar to the U.S. dollar.
 Pros: Provides stability and predictability in international trade and investment.
 Cons: Requires large foreign currency reserves and can limit monetary policy flexibility to
respond to domestic economic conditions
2. Freely Floating Exchange Rate System:
 Definition: In a freely floating exchange rate system, the value of a currency is determined
solely by supply and demand in the foreign exchange market, without government
intervention.
 Mechanism: Market forces such as trade flows, foreign investment, and speculation
determine the exchange rate.
 Examples: The U.S. dollar, British pound, and Japanese yen are managed under floating
exchange rate systems.
 Pros: Reflects the true market value of a currency, allows for automatic adjustments to
economic changes, and does not require large foreign reserves.
 Cons: Can lead to high volatility, making it unpredictable for businesses and investors
3. Managed Floating Exchange Rate System:
 Definition: Also known as a "dirty float," a managed float system allows the currency to float
according to market forces, but the government or central bank occasionally intervenes to
stabilize or influence the exchange rate.
 Mechanism: The central bank may step in by buying or selling its own currency in the
foreign exchange market to prevent extreme volatility or to achieve economic objectives.
 Examples: China and India use managed float systems.
 Pros: Combines the benefits of floating and fixed systems, allowing for flexibility while
maintaining some control over the exchange rate.
 Cons: Can be difficult to strike the right balance between allowing market forces to act and
intervening to stabilize the currency
4. Pegged Exchange Rate System:
 Definition: A pegged exchange rate system (similar to a fixed system) ties the value of a
currency to a major currency, but with small periodic adjustments to reflect changes in
market conditions. A specific type of pegged system is the crawling peg, where the exchange
rate is allowed to fluctuate within a certain range or adjusted at a preannounced rate.
 Mechanism: The central bank or government adjusts the exchange rate either according to a
set schedule or based on specific economic indicators like inflation.
 Examples: Some countries in Latin America have used crawling pegs, where their currency
is adjusted in small increments against the U.S. dollar.
 Pros: Allows for gradual adjustments in the exchange rate while maintaining some level of
stability.
 Cons: Still requires intervention and monitoring, and can be subject to speculative attacks if
not managed properly
These systems vary in terms of flexibility, government intervention, and the degree of stability they
provide. Each system has its advantages and drawbacks, making it suitable for different economic
environments.
Grate Depression
The Great Depression was a severe global economic downturn that began in 1929 and lasted
through the 1930s. It was the most widespread and longest-lasting economic depression of the 20th
century, with profound effects on both industrialized and non-industrialized nations.
Key Causes:
1. Stock Market Crash of 1929: The U.S. stock market crash in October 1929, often referred
to as Black Tuesday, triggered the Great Depression. The collapse in stock prices led to a
loss of wealth and confidence, which severely reduced consumer spending and investment.
2. Bank Failures: As banks began to fail, people withdrew their savings, leading to a collapse
of financial institutions. By 1933, nearly half of the U.S. banks had failed.
3. Reduction in Consumer Spending: Widespread fear and loss of wealth caused a sharp drop
in consumer demand for goods and services, leading to lower production, factory closures,
and massive layoffs.
4. Decline in International Trade: Protectionist trade policies, such as the Smoot-Hawley
Tariff in the U.S., led to a decrease in global trade. Countries retaliated with tariffs of their
own, which worsened the economic situation.
5. Drought and Agricultural Collapse: In the U.S., the Dust Bowl further exacerbated the
crisis, destroying crops and displacing farmers, especially in the southern Great Plains.
Key Effects:
1. Mass Unemployment: Unemployment rates soared during the Depression. In the U.S.,
unemployment reached about 25%, while other industrialized countries experienced similarly
high rates.
2. Homelessness and Poverty: With unemployment came widespread homelessness and
poverty. Many families lost their homes, and "shantytowns" or Hoovervilles sprang up across
the U.S. as people sought shelter.
3. Global Economic Impact: The Depression spread globally, affecting Europe, Latin
America, and Asia. Countries like Germany and Japan, already struggling from war
reparations or economic instability, faced further economic hardship, contributing to the rise
of extremism and leading to World War II.
Government Response:
1. The New Deal: In the U.S., President Franklin D. Roosevelt introduced the New Deal in
1933. This series of programs aimed to provide relief, recovery, and reform. Key initiatives
included public works programs (such as the Civilian Conservation Corps), social safety
nets (such as Social Security), and financial reforms like the Glass-Steagall Act, which
created the Federal Deposit Insurance Corporation (FDIC) to protect bank deposits.
2. Monetary Policies: Many countries abandoned the gold standard, which allowed more
flexibility in their monetary policies and helped stimulate their economies.
End of the Great Depression:
The Great Depression began to ease with the onset of World War II. The demand for wartime
production led to job creation and increased industrial output, helping economies recover from the
long-term economic slump.
The Great Depression was a transformative event, reshaping governments' roles in the economy,
leading to significant social, political, and economic changes around the world. Its lessons about
market regulation, monetary policy, and social safety nets continue to influence economic policies
today.

The gold standard was a monetary system where a country's currency had a value directly linked to
gold. Under this system, countries agreed to convert paper money into a fixed amount of gold. The
gold standard helped stabilize international trade by maintaining fixed exchange rates between
different currencies.
Key Moments in the Gold Standard's History:
1. Adoption of the Gold Standard:
o The modern gold standard began in the 19th century. The United Kingdom adopted it
in 1821, and many countries followed suit. By the late 19th century, most of the major
economies, including the U.S., Germany, and France, were on the gold standard.
2. Abandonment during World War I:
o Countries suspended the gold standard during World War I (1914-1918) to print more
money to finance the war effort. After the war, many countries attempted to return to
it, but it proved difficult due to the economic turmoil of the 1920s.
3. The Interwar Period and Final Departure:
o The Great Depression forced many countries to abandon the gold standard again. In
1931, the U.K. left the gold standard, and the U.S. followed in 1933 under President
Franklin D. Roosevelt, although the dollar remained tied to gold for international
transactions. This period marked the gradual end of the classical gold standard.
4. Bretton Woods System (1944-1971):
o After World War II, the Bretton Woods Agreement established a modified gold
standard, where the U.S. dollar was linked to gold at $35 per ounce, and other
currencies were pegged to the dollar. This system lasted until 1971, when President
Richard Nixon ended the U.S. dollar's direct convertibility to gold, effectively ending
the gold standard for good.
5. Post-1971: Fiat Currency:
o After 1971, the world moved to a fiat currency system, where the value of money is
not based on a physical commodity like gold but is instead backed by the government
that issues it.
In summary, the gold standard was used widely from the 19th century until the mid-20th century, but
it was abandoned due to economic pressures, most notably during the Great Depression and later in
the 1970s.
The history of exchange rates is closely tied to how countries have valued and traded currencies
over time. Here's an overview of the key periods and systems that shaped the development of
exchange rates:
1. Barter System (Pre-Monetary Era):
 Before currencies existed, people used a barter system, trading goods and services directly.
There were no exchange rates as we know them today.
2. Precious Metal Currencies (Ancient to Early Modern Period):
 Ancient civilizations, such as the Greeks, Romans, and Chinese, used precious metals like
gold and silver to facilitate trade. The value of these metals was relatively stable across
regions, creating an early form of an exchange system.
 Different empires minted their own coins, and the value of these coins was determined by
their weight in gold or silver.
3. The Gold Standard (19th Century to Early 20th Century):
 In the 19th century, the gold standard was introduced, where the value of a country’s
currency was tied to a specific amount of gold. The U.K. was the first to adopt it in 1821,
followed by other nations.
 Under this system, currencies were convertible into gold, and exchange rates between
countries were stable since they were based on fixed gold values.
 This system created predictability and stability, encouraging global trade during the industrial
revolution.
4. World War I and Suspension of the Gold Standard (1914-1920s):
 World War I disrupted the global economy, and many countries suspended the gold standard
to finance war efforts by printing more money. This led to inflation and exchange rate
instability.
 After the war, countries attempted to return to the gold standard, but with limited success due
to economic challenges in the 1920s.
5. The Great Depression and Collapse of the Gold Standard (1930s):
 The Great Depression of the 1930s caused massive economic turmoil, forcing many
countries to abandon the gold standard once again. Exchange rates became highly volatile.
 In 1931, the U.K. left the gold standard, and the U.S. partially abandoned it in 1933. Most
major economies left the gold standard during this period, ending the era of fixed exchange
rates based on gold.
6. Bretton Woods System (1944-1971):
 After World War II, the Bretton Woods Agreement was established in 1944 to create a
stable global financial system. Under this system, the U.S. dollar was tied to gold at $35 per
ounce, and other currencies were pegged to the U.S. dollar.
 This system lasted until 1971, when President Richard Nixon ended the convertibility of the
U.S. dollar into gold. This event, known as the Nixon Shock, marked the end of the Bretton
Woods system.
7. Post-Bretton Woods: Floating Exchange Rates (1970s-Present):
 After the collapse of the Bretton Woods system, the world moved to a system of floating
exchange rates. In this system, currency values are determined by market forces (supply and
demand) without fixed pegs to gold or other currencies.
 Today, most major currencies, such as the U.S. dollar, Euro, and Japanese yen, operate under
a floating exchange rate system. Central banks may intervene in the market, but currency
values are generally determined by global trade and investment flows.
8. Current Exchange Rate Systems:
 Floating Exchange Rates: Many countries, including the U.S., allow their currencies to
fluctuate based on market conditions. This is the most common system today.
 Fixed Exchange Rates: Some countries still peg their currencies to major currencies. For
example, Hong Kong pegs its dollar to the U.S. dollar.
 Managed Float: Some countries, like China, use a "managed float" system, where the
currency is allowed to fluctuate within a controlled range, with occasional government
intervention to stabilize it.
Conclusion:
The history of exchange rates reflects broader economic trends and global events. From the stability
of the gold standard to the flexibility of floating rates today, the systems used to manage currency
values have evolved in response to changes in international trade, finance, and policy. Each period
brought its own challenges, shaping the complex exchange rate system we have today.

The relationship between currency appreciation/depreciation and exports/imports is a fundamental

concept in international economics. Here’s an overview of how changes in currency value can affect
trade:
Currency Appreciation
 Definition: Currency appreciation occurs when the value of a currency increases relative to
other currencies.
 Impact on Exports:
o Negative Effect: When a country's currency appreciates, its goods become more
expensive for foreign buyers. As a result, exports may decline because foreign
consumers might turn to cheaper alternatives from other countries .
 Impact on Imports:
o Positive Effect: Conversely, an appreciating currency makes foreign goods cheaper
for domestic consumers. This can lead to an increase in imports as consumers and
businesses take advantage of lower prices on foreign products .
Currency Depreciation
 Definition: Currency depreciation occurs when the value of a currency decreases relative to
other currencies.
 Impact on Exports:
o Positive Effect: A weaker currency makes a country's goods cheaper for foreign
buyers, potentially increasing demand for exports. This can lead to higher sales and
revenue for exporters .
 Impact on Imports:
o Negative Effect: A depreciated currency makes imported goods more expensive for
domestic consumers. This can lead to a decrease in imports as consumers may look
for cheaper local alternatives or reduce their consumption altogether .
Summary of Relationships
1. Appreciation:
o Exports: Likely to decrease due to higher prices for foreign buyers.
o Imports: Likely to increase due to lower prices for domestic consumers.
2. Depreciation:
o Exports: Likely to increase due to lower prices for foreign buyers.
o Imports: Likely to decrease due to higher prices for domestic consumers.
Examples and Insights
 For instance, if the U.S. dollar strengthens against the Euro, American products become more
expensive for European consumers, potentially leading to reduced exports to Europe.
Meanwhile, European goods become cheaper for American consumers, which could increase
imports from Europe .
 Conversely, if the dollar weakens, U.S. exports may become more competitive in
international markets, boosting demand, while imports from Europe may decline due to
higher costs .
Conclusion
Understanding the relationship between currency fluctuations and trade balances is essential for
policymakers, businesses, and economists. Changes in currency values can significantly influence a
country's trade position, impacting economic growth and the overall health of the economy.
What Is Currency Appreciation?
Currency appreciation is an increase in the value of one currency to another in forex markets. A
currency's value increases for various reasons, including changes in governments' monetary and
fiscal policies, interest rates, trade balances, and business cycles.
Forex Trading
A forex investor trades a currency pair hoping for the appreciation of the base currency against the
counter currency. In a floating rate exchange system, the value of a currency constantly changes
based on supply and demand. The fluctuation in values allows traders and firms to increase or
decrease their holdings and profit from them. If the value appreciates, demand for the currency also
rises. In contrast, if a currency depreciates, it loses value compared to the currency against which it is
being traded. If the U.S. dollar (USD) / euro (EUR) exchange rate changed from 0.92 to 0.95, the
USD appreciated against the EUR by 3.26%. $100 went from being worth 92 EUR to 95 EUR,
which would be good news for people or companies needing to exchange USD for EUR and bad
news for those wanting to do the opposite. Currency appreciation differs from increases in securities
prices. Currencies are traded in pairs. Thus, a currency appreciates when its value increases
compared to its pair. When a stock appreciates, this is often based on the market’s assessment of its
intrinsic value.2 Appreciation benefits the forex trader who went "long" the currency in a trade, and
importers, who see the money in their local currency as worth more.

Example of Currency Appreciation

Investors may see USD/JPY = 149.2. The first of the two currencies (USD) is the base currency and
represents a single unit, or 1.0 in the fraction 1.0/149.2. The second is the quoted currency
representing the amount equal to one unit of the base currency. Thus, "One U.S. dollar buys 149.2
units of Japanese yen." The increase or decrease of a rate always corresponds to the
appreciation/depreciation of the base currency, and the inverse corresponds to the quoted currency.
The USD/JPY currency pair has experienced significant fluctuations since 1990. By the mid-1990s,
the yen had appreciated sharply, reaching a high of around 80 yen per dollar in 1995.3 In 1998, the
pair reached a low of around 145 yen per dollar.3 The dot-com bubble and its burst in the early
2000s and the global financial crisis in 2008 caused the pair to fluctuate wildly. The pair has been
shaped by divergent monetary policies: the U.S. Federal Reserve's quantitative easing, followed by
gradual tightening, contrasted with the Bank of Japan's persistent ultraloose monetary policy to
combat deflation. The Bank of Japan maintained a policy of very low or even negative interest rates.
In 2020, the COVID-19 pandemic initially caused a flight to safety, strengthening the yen as
investors sought refuge from market volatility.4 By 2024, the USD had appreciated against the
JPY to levels not seen since before 1990—a result of higher interest rates in the U.S. as the Bank of
Japan pushed for a looser yen.

Currency Currency
Aspect/Effects Appreciation Depreciation

May lead to intervention to May lead to intervention

Central Bank Actions
slow appreciation to slow depreciation
Currency Currency
Aspect/Effects Appreciation Depreciation

Foreign debt becomes easier Foreign debt becomes

Debt Repayment
to repay harder to repay

A rise in the value of a A decrease in the value of

Definition currency relative to at least a currency relative to
one other currency other currencies

Decreases for foreign

Domestic Purchasing Power Increases for foreign goods
goods

Depreciation generally
Strong economic growth can
leads to declines, but it's
lead to currency appreciation
Economic Growth often a path for growth
as it signals a robust and
since it makes domestic
stable economy
goods cheaper oversees

Often associated with strong Often associated with

Economic Indicators
economic indicators weak economic indicators

It takes less of the other

It takes more of the other
currency to buy one unit
Exchange Rate Effect currency to buy one unit of
of the depreciating
the appreciating currency
currency

May attract more foreign May discourage foreign

Foreign Investment
investment investment

Become cheaper for

Become more expensive for
Impact on Exports buyers using other
buyers using other currencies
currencies

Impact on Imports Become cheaper Become more expensive

Inflation Tends to decrease Tends to increase

Higher interest rates in a

country can attract foreign Lower interest rates can
Interest Rates
capital, leading to currency decrease value
appreciation.

Higher investor confidence Flight of investment

can lead to currency capital tends to depreciate
Investor Confidence
appreciation due to increased currencies in the home
demand for the currency. country

Tourism Outbound tourism increases, Inbound tourism

Currency Currency
Aspect/Effects Appreciation Depreciation

inbound tourism may increases, outbound

decrease tourism may decrease

May improve (if exports

May worsen (if exports
Trade Balance increase more than
decrease more than imports)
imports)

The term "dirty rate" in economics typically refers to the exchange rate of a currency that is
influenced by government intervention rather than being determined solely by market forces. This
can occur in a managed float exchange rate system where a central bank intervenes to stabilize or
influence the value of its currency.

Key Characteristics of the Dirty Rate:

1. Government Intervention: In contrast to a "clean" or "free" float, where currency values

fluctuate based purely on supply and demand, a dirty rate indicates that a government or
central bank actively buys or sells its currency in the foreign exchange market to achieve a
desired exchange rate.
2. Objective of Stabilization: The primary goal of using a dirty rate is often to stabilize a
currency that may be subject to excessive volatility, which can disrupt trade and economic
activity.
3. Flexibility: While the currency is allowed to float within certain limits, the intervention aims
to prevent extreme fluctuations that could harm the economy.
4. Impact on Trade: A dirty rate can affect a country's trade balance by making exports
cheaper or more expensive depending on the interventions made.

Example:

 A country may decide to lower its currency's value to boost exports. By selling its currency in
the market, the government can make its goods cheaper for foreign buyers, potentially
increasing demand for those goods.

Conclusion:

Understanding the concept of a dirty rate is crucial for analyzing how central banks manage their
currencies and the implications of such interventions on international trade and finance. For more
detailed information, you can refer to sources such as Investopedia on exchange rate systems or the
International Monetary Fund (IMF) resources on currency intervention policies.

The domino effect is a concept that describes how one event can trigger a series of related events,
often leading to significant consequences. This term is commonly used in various contexts, including
economics, social behavior, politics, and even psychology.

Key Aspects of the Domino Effect:

1. Sequential Causality: The domino effect illustrates a chain reaction where an initial event
causes subsequent events, similar to a line of dominoes falling one after another. For
example, in economics, a financial crisis in one country can lead to instability in neighboring
countries or globally due to interconnected markets.
2. Social and Political Contexts: In social and political contexts, the domino effect often refers
to how the fall of one regime can lead to the fall of others. This was notably discussed during
the Cold War, where U.S. policymakers feared that if one country in Southeast Asia fell to
communism, neighboring countries would follow suit—commonly known as the "domino
theory."
3. Psychological Phenomena: In psychology, the domino effect can refer to how a single action
or decision can lead to a series of behaviors or choices. For example, making small positive
changes in lifestyle can motivate individuals to make more significant changes over time.

Examples:

 Economic Example: The 2008 financial crisis serves as an example of the domino effect in
economics, where the collapse of major financial institutions led to a global recession,
impacting economies worldwide .
 Political Example: The Arab Spring is often cited as an instance of the domino effect in
politics, where protests in Tunisia sparked similar movements across the Middle East and
North Africa .

Conclusion:

The domino effect illustrates the interconnectedness of events and how small changes or actions can
lead to significant and far-reaching consequences. Understanding this concept is crucial for
analyzing complex systems in various fields.