Chapter 11 · International Trade and Exchange Rates

International Trade

International trade is the buying and selling of goods and services between countries. Businesses may sell some of their output abroad and purchase goods, machinery or other resources from overseas suppliers. In the textbook, international trade is linked to greater business growth, competition and consumer choice.

• Countries can obtain goods that cannot be produced domestically, perhaps because of climate or resources.
• Firms and consumers may buy certain goods from overseas at lower prices.
• International suppliers give consumers a wider choice of products.
• Businesses can sell surplus output or commodities beyond what the domestic market needs.
• International demand may help a business expand, though it also exposes the business to competition.

The book’s charts show Toyota’s sales growing from roughly 6.25 million vehicles in 2003 to 8.97 million in 2017. Sales in the “Other” regions increased notably, although the figures are historical and should not be taken as current results.

Visible and Invisible Trade

When a business supplies an overseas customer it makes an export; when it buys from an overseas supplier it makes an import. Exports and imports include physical goods and services, but the textbook distinguishes two types of trade.

For the year to July 2016, the textbook gives India’s visible exports as US$21,690 million and imports as US$29,450 million. The balance was 21,690 − 29,450 = −US$7,760 million: a visible trade deficit.

A deficit in visible trade does not by itself tell us the overall balance for all goods and services, because invisible trade also matters.

What Is an Exchange Rate?

Different countries use different currencies. Businesses and individuals must therefore convert money when making some international payments. An exchange rate states the value of one currency in terms of another. The direction of the quote matters: a rate of £1 = US$1.50 means one pound buys 1.50 dollars.

How to Calculate Currency Conversions

Use the rate’s units to decide whether to multiply or divide. If £1 = US$1.50, convert pounds to dollars by multiplying by 1.50; convert dollars to pounds by dividing by 1.50. Always state the answer’s currency.

These are the hypothetical textbook examples, not present-day exchange rates.

The Impact of Changes in the Exchange Rate on Importers and Exporters

A change in the exchange rate alters the price of a country’s exports for overseas buyers and the price of its imports for domestic buyers, assuming other prices stay the same. The textbook uses a fall and a rise in the value of the pound to explain these effects.

Fall in the Exchange Rate

A depreciation is a fall in the value of a currency. For example, suppose the pound falls from £1 = US$1.50 to £1 = US$1.20:

• Exports become cheaper to US customers: UK goods worth £2 million initially cost US$3 million, but now cost only US$2.4 million. Demand for exports may rise.
• Imports become dearer to UK buyers: imports worth US$600,000 initially cost £400,000, but now cost £500,000. Demand for imports may fall.

Rise in the Exchange Rate

An appreciation is a rise in the value of a currency. Suppose the pound instead rises from £1 = US$1.50 to £1 = US$2.00:

• Exports become more expensive to US customers: the same £2 million shipment costs US$4 million instead of US$3 million. Demand may fall.
• Imports become cheaper to UK buyers: the same US$600,000 shipment costs £300,000 instead of £400,000. Demand may rise.

Important: These are likely price-and-demand effects, not guarantees. Demand also depends on quality, competition, how responsive customers are to price and whether businesses change their selling prices.

International Competitiveness and Exchange Rates

Exchange rates influence international competitiveness: how successfully a country’s products compete with foreign alternatives on price and other factors. A sustained fall in a currency can make its exports more competitively priced and encourage sales abroad. A sustained rise can make exports relatively expensive.

The textbook gives a historical example of the South African rand weakening against the euro. In 2010, €1 = ZAR 8.75; by 2015, €1 = ZAR 18.28. A tourist holding euros could buy more rand, potentially making visits to South Africa more affordable. The book links this to tourism growth; these rates are historical.

Import Costs, Commission and Uncertainty

Depreciation can harm firms importing raw materials, machinery or finished goods because foreign purchases become more expensive. It may increase production costs, reduce profit margins or lead to higher prices. Businesses may also pay commission when exchanging currency—the textbook mentions a typical charge around 2%—so conversion itself has a cost.

If exchange rates move unpredictably, importers and exporters find it harder to forecast costs, revenues and demand. This uncertainty makes budgeting and investment decisions more difficult.

Large vs Small Businesses

The book notes that large businesses are often more exposed to exchange-rate movements because they are more likely to buy and sell goods internationally. They may have sales, factories and suppliers in several currencies.

Small businesses are not immune. A local retailer that buys imported clothing or electronic products may pay more after its currency falls, even if it sells only to domestic customers. A small exporter may benefit from a weaker currency through cheaper overseas prices.

Judgement: Whether a business benefits depends not just on its size but on the balance of foreign sales and purchases, customers’ sensitivity to price, and how much it relies on imported inputs.