Monetary chapter 7

• Trade means the exchange of goods and services.
• International trade refers to the exchange of goods and services between one country and other countries.
• Alimited scope of international trade existed during the ancient times. The Mediterranean Sea became the center of trade, and the Romans dominated such trade.
• However, the invasions of the Barbarians put an end to the prosperous Mediterranean trade. For hundreds of years, feudalism was the only form of economy
• Mercantilism is a politico-economic doctrine that believes that the power and glory of a country emanate from the acquisition of more gold and silver through a favorable foreign trade.
• the Galleon trade in the Philippines was an example of mercantilism during the Spanish time.
• Among the colonial empires, only England managed to survive from operations of mercantilism due to its higher stage of economic development and the presence of its superior sea transport facilities
• Countries trade to distribute economic resources equally around the world.
• General bases of international trade:

  1. Distribution of Economic resources
  2. Technological efficiency
• Adam Smith, the leader of the classical economists, crusaded for free trade. He said that if it is cheaper to buy a product than to produce it, then do not produce it
• David Ricardo, refined the theory of comparative advantage.
• Comparative advantage Theory states that a country should export those goods in which it has the greatest advantage, and import those goods in which it has the greatest disadvantage.
• The basic idea of free trade is based on the theory of comparative advantage.
• Trade barriers: Tariffs and qouta
• tariff is a tax on imported goods
• import quota limits the number of goods to be imported.
• In the process of international trade among countries of the world, goods, and services are being exchanged. Such exchanges are being facilitated through the medium of international payment system which is conducted mostly with the use of the U.S. dollar.
• All our financial transactions made by individuals, businessmen, and government agencies with those of other countries are indicated in the balance of payments.
• Balance of payments — an annual accounting statement of all financial transactions of a country with the rest of the world. e include transactions of individuals, businessmen, and government agencies of one country
• Balance of trade — a situation where the value of the exports of a country is equal to the value of its imports.
• Visible items — refer to goods in the balance of payments
• Invisible items — pertain to services in the balance of payments.
• Surplus balance of payments — a situation where the receipts (incomes) are greater than the payments (expenses
• Credits– these are the receipts of individuals, organizations, or governments coming from other countries. Examples: salaries of overseas workers, IMF loans, foreign donations, U.S. base rentals, export earnings, expenses of Japanese tourists in the country, etc
• Deficit balance of payments —a situation where the receipts are lesser than the payments.
• Debits – These are the payments of individuals, organizations, or the government of a country to other countries. outflows of resources from a country.
• Components of balance of payments:

  CurCapCash

  • Current Account
  • Capital Account
  • Official monetary reserves or Cash Account
• Current account This includes exports and imports of

  goods and services.
• Capital account It is a record of all transactions relating to private investments, grants, and loans with other countries
• Official monetary reserves/Cash account These are the assets of the Central Bank in the form of gold reserves, international currency reserves(likeU.S. dollars,British pound,
• In the case of goods that are not recorded because these are smuggled, undervalued or their payments are too small, they are included in the "net errors and omissions" item in the balance of payments.
• Causes of balance of payments: SMD

  • Structural or real causes.
  • Monetary causes
  • Domestic inflation raises
• Structural or real causes. The traditional exports of the less developed countries are predominantly primary products, such as tea, coffee, sugar, or copra.
• the demand for such products in the world markets is inelastic. This means that whether there is a great increase or decrease in the prices of such products, the quantity demanded does not change much.
• Monetary causes. Improper monetary policies can create balance of payments problems for a country. For instance, the creation of more money without the corresponding increase in the production of goods and services results in inflation.
• Domestic inflation raises the prices of export products. As a result, demand for such products falls.
• SOLUTIONS TO BALANCE OF PAYMENTS:

  
  

  Adjustment in the balance of payments is necessary to equalize receipts and payments. For the less developed countries adjustment means solving their balance of paynents deficits.
• Central Bank, it can execute any of the following policy measures:

  1. Increase cash margins for the opening of the letters of credit relative to the importation of luxuries and other essential goods, or the importation of goods which are prejudicial to the interest of the Philippine economy.
  2. Total ban on the importation of the aforementioned goods is No. 1.
  3. Limit dollar allocations to importers of said goods, together with unnecessary foreign travels.
  4. Impose a higher exchange rate for the importation of such goods.
• Our peso was changed — relative to the U.S. dollar--from pegged (fixed) exchange rate to floating exchange rate in 1963.
• The peso was devalued from P2 to P3.90 to a U.S. dollar. In 1970, it was again devalued to P6. In view of the increasing demand for the US. dollar, the value of the Philippine peso has been falling.