Accounting and International Trade

• Standard of Living


  The level of material well-being of an individual or nation. It may also be known as the quality of life which the people of a country have.
• Quality of Life


  More subjective than standard of living, factors like equal protection of the law, freedom from discrimination and freedom of religion are difficult to measure
• Standard of Living


  More objective, factors like gross domestic product, poverty rate and environmental quality can be measured and defined with numbers
• Factors Influencing Standard of Living & National Income

  • National/Natural Resources
  • Industrial Development
  • Quality of Labour
  • Economic Stability
  • Political Stability
  • Life Expectancy
  • Literacy Rate or Education
  • Infant Mortality Rate
  • Pollution
• Gross Domestic Product (GDP)


  Measures the total output within a country regardless of whether the factors of production are owned locally or not
• Gross National Product (GNP)


  The value of output created by nationally owned factors of production whether at home or abroad
• Per Capita Income


  The national income of a country divided by its population. The higher the value, the higher the standard of living.
• PQLI (Personal Quality of Life Index)


  A measure of the standard of living and economic development which measures infant mortality rate, literacy level and life expectancy
• National Income Variants


  • GDP
  • GNP
  • NNP: Net National Product (GNP minus depreciation of capital goods)
  • DI: Disposable Income (PI minus personal taxes)
  • PI: National Income (NI) minus taxes, profits, social security contributions and transfer payments
• Methods of Measuring National Income

  1. Income Approach

  2. Expenditure Approach

  3. Output Approach
• Economic Growth

  A quantitative increase in the level of income or output of a country, measured by GDP
• Economic Development


  Changes in the economy and improvements in the quality of life, including the provision of facilities that enable growth to take place
• Economic Development


  Leads to Economic Growth
• Reasons for and Importance of International Trade

  • Countries can acquire goods and services it does not produce
  • Countries can sell goods to earn foreign exchange
  • Exposes local firms to greater competition
  • Can promote political links between countries
  • Can promote economic growth
  • Increases the size of a producer's market
  • Can lead to improved product quality
  • Can lead to lower prices for consumers
• Comparative Advantage


  If two countries are producing the same good, the country which produces the most has absolute advantage. However, the countries may still be able to trade if one country has a comparative advantage in the production of one good while the other has comparative advantage in the production of another good.
• Balance of Trade


  The trade in visible exports and imports, also known as the merchandise balance
• Balance of Payments


  The record of the financial transactions between one country and its trading partners over one year, including the current account and capital account
• Balance of Trade Deficit

  The total value of imported goods is greater than that of exported goods, resulting in a net outflow of foreign currency to pay for imports
• Balance of Payments Deficit

  The country needs to use valuable foreign exchange to finance its debts, which can lead to borrowing from institutions like the IMF with attached requirements
• Devaluation


  The lowering of the value of a country's currency in relation to other currencies, making imports more expensive and exports cheaper
• Devaluation


  Can make prices of goods higher for consumers and reduce the availability of imported products
• Internal Measures to Deal with an Adverse Balance of Payments

  • Short Term: Exchange controls, use of foreign exchange reserves
  • Medium Term: Tariffs, licenses, quotas, bans
  • Long Term: Promoting local products, subsidising export businesses, ensuring industrial peace, improving tourism
• External Measures to Deal with an Adverse Balance of Payments

  • Short/Medium Term: Borrowing from central banks, IMF, accepting gifts
  • Long Term: Trade agreements, promoting tourism
• Saving


  Not spending part of one's income or the postponement of present consumption
• Investment


  Funds or money spent on producing capital goods e.g. machinery, plant and equipment
• Saving and Investment


  Interact to cause economic growth, as savings provide funds for investment in capital goods
• The more money that is saved, the greater the pool of funds available for investment in capital goods, leading to increased growth and development