International Monetary Economics - Example

International monetary economics of affiliation Introduction International Monetary Economics is a subsidiary of economics which offers a platform for evaluating money and its roles as medium of exchange, division of account and store of value over the international boundaries through international trade. This essay seeks to dissect various aspects of international monetary economics relative to the international trade dynamics. These may include partial equilibrium analysis in a single industry, costs and benefits of tariffs, export subsidies, import quotas, Gross National Product, balance of payments, exchange rates and control of money supply. Supply, Demand, and Trade in a Single Industry The law of supply and demand in a single industry like that of tea or wheat across different borders is occasioned by the nature of tariff that exists. A tariff refers to the tax charged on imported products (Gandolfo, 1995). The trend difference in which home consumers demand goods and the amount produced and supplied by the home producers translates to an import demand curve when particular prices are applied. Consider the following example of an import demand curve which is given by the equation MD= D-S Source: Gandolfo, G. (1995). International economics: 2. Berlin [u.a.: Springer. It is evident that from the graph, the curve seizes the price axis at the local equilibrium price (PA). In addition, the curve indicates that as the amount imports demanded declines the attributed price increases. The curve is in upward sloping presentation. On the other hand, consideration of the export curve, it is realizable that it signifies the difference existing between the amount supplied by the foreign producers and the amount demanded by the foreign consumers at particular prices (Gandolfo, 1995). The foreign export supply curve is given by the following illustration that helps in deriving the foreign export supply curve. XS*= S* –D* The curve meets the price axis at the local equilibrium price (PA*). The presentation of this curve is in upward sloping, indicating that, the amount of goods exported increase with the price increase. Consider the following Source: Gandolfo, G. (1995). International economics: 2. Berlin [u.a.: Springer. The following attributes defines the equilibrium of supply, demand and trade in a single industry The Import demand = export supply, this translates to the following Home demand- Home supply = Foreign supply- Foreign demand This analysis brings us to the benefits attributed to the costs and tariffs in the world equilibrium Costs and Tariffs In the international trade where imports and exports occur, a tariff plays a critical role in the world trade equilibrium. This is a cost that can be likened to the transportation cost whose influence makes the sellers shy away from shipping products unless the Home price is more than the foreign price (Gandolfo, 1995). In most cases, the exceeding amount must be equal to the tariff amount so as to have a profit. The increase of price in the local market and the decrease of price in the foreign market are immensely attributed to a tariff. Consider the following illustration of effects of tariff on various types of markets Source: Gandolfo, G. (1995). International economics: 2. Berlin [u.a.: Springer. In the case of the world market, as the price increases, a drop in the quantity is recorded. Effects of tariff in a small country Small nations have insignificant demand for goods relative to the world demand and this makes them less influential on the foreign price (Gandolfo, 1995). This explains the reason why the foreign price does not change when small nations are considered. However, the home price increases by the whole amount of the tariff and this is primary disadvantage small nation face when participating in the international trade (Gandolfo, 1995). This effect of tariffs on small nations explains the reluctance of numerous small nations participating actively in the international trade. Consider the following illustration on the effect of a tariff on a small nation Source: Gandolfo, G. (1995). International economics: 2. Berlin [u.a.: Springer. In cases of policy changes the effective rate of protection is factored in depending on the change in value in a particular industry, which is added into the production process. This depends entirely on the variation in prices and trade policy (Gandolfo, 1995). It is imperative to note that, the effective rates of protection fluctuate from tariff charges since the tariffs influence various sectors besides the protected one. Consider the following example The mobile sells in the global market for $ 10000, from $ 8000 factors of production, the value that is added to the overall production cost will be calculated as follows $10000-8000 = 2000 In the event a nation imposes a 20% tariff on the imported mobiles the home firms can charge $12,000 instead of $10,000. This translates to the effective protection for home mobile firms of 100% as computed as follows 4000-2000/2000 = 100% Effective rate of protection > tariff rate Some of the costs and benefits attributed to tariffs include the increase of the cost of an imported product which is disadvantageous to the consumers while it increases the profitability of the producers. Further the various governments involved in the international trade gains the tariff revenues. Consider the following illustration which indicates the costs and benefits to consumers, producers and the governments. Source: Gandolfo, G. (1995). International economics: 2. Berlin [u.a.: Springer. Export subsidy This can either be specific whereby it implies payment for each unit exported is made or ad valorem whereby a portion of the total value of the exported is paid. Some of the effects attributed to the export subsidy include damage to the national welfare in terms of efficiency as indicated in the graph. This aspect of efficiency arises in a situation where by the producers are attempted to produce so much that the consumers could not fully consume due to their limited desire. Consider the following graph indicating the effects created to consumers, producers and government by tariffs. Source: Gandolfo, G. (1995). International economics: 2. Berlin [u.a.: Springer. Import Quota This refers to a restraint on the amount of a particular product that may be imported. This is imposed by the issuance of licenses and rights relative to the quota system. Application of the quota system is disadvantageous to the government because the intended revenues attributed to the selling of imports at lofty prices are directed to the license holders (Gandolfo, 1995). The excess revenues are referred to as the quota rents. Similarly the voluntary export quota requested by the exporting nations works the same as the import quota. The following illustration is a good example on how the import quota influences sugar. Source: Gandolfo, G. (1995). International economics: 2. Berlin [u.a.: Springer. Balance of Payments This is a critical part of the monetary economics relative to the international trade. They are divided into classes which include current and capital accounts. In the case of current accounts, it deals with the flow of goods and services. On the other hand, the capital account deals with the flow of finical assets and in some cases other various kinds of assets (Gandolfo, 1995). The aspect of the double entry characterizes the each transaction of the balance of payments and the following equation Current account +capital account =0 Gross National Product (GNP) This refers to the value of the total final goods and services that a nation’s factors of production are able to produce in a particular period. Factors of production imply the attributes of labor, capital and natural resources. For instance, the US-owned factors of production are termed as the US-GNP (Gandolfo, 1995). Consider the following illustration of the US-GNP and its attributed components Source: Gandolfo, G. (1995). International economics: 2. Berlin [u.a.: Springer. Money Control Money is a medium of exchange and it requires particular control to ensure that the business market is ideal for transactions. In most cases, the central bank takes charge of controlling the amount of money which circulates in an economy. This aspect is called money supply. On a similar note, the aspect of money demand refers to the quantity of money in terms of assets which people are willing to hold at a particular time (Gandolfo, 1995). The demand for money is influenced by interest rates, risks and liquidity. The aggregate real money demand and the interest rate is illustrated in the graph below Source: Gandolfo, G. (1995). International economics: 2. Berlin [u.a.: Springer. References Gandolfo, G. (1995). International economics: 2. Berlin [u.a.: Springer. Read More