The international marketThe importance of international tradeThe reason why countries tradeadditional income from the sale of goods/servicesselling abroad brings in money from other countriesquality of life of all countries involved can be improvement of foreign trade = purchase and sale of goods/services between different countries of the world Import = purchased from another country – outflow of funds Export = sold to another country – inflow of funds Visible trade = import and export of goods Invisible trade = import and export of services (tourism, transport, insurance...) principle of comparative costs: difference between climate or natural resources  countries must trade to obtain goods that they cannot produce themselves  specialization and differentiation in raw materials for which they have a comparative advantage (low production costs)  import raw materials from countries where production is comparatively cheaper Trade balance (trade gap) = records the value of the countries' imports and exports  favorable - when the exports exceed imports ( a surplus has been created)adverse (unfavorable) – when imports exceed exports ( deficit has been created) Balance of paymentsvisible = goodsinvisible = services= a statement of the difference in the total value of all payments made to other countries and the total payment received from them includes visible and invisible shows whether the country is making a profit or loss in its dealings with other countriesfavorable – net inflow of capital (the country has earned more than it has spent)adverse – net outflow (the country has spent more than it has earned) current account = records trade in goods and services capital account = records flows for investment and saving purposes Correcting the trade deficit temporary measures: • take loans from the International Monetary Fund (IMF) • obtain loans from abroad • draw on gold and foreign exchange reserves • sell off foreign assets!!! increase in exports!! ! government: offer incentives to businesses (tax breaks, special credit facilities, subsidies) Devaluation= lower the value of the currency compared to other currencies makes imported goods more expensive and exports cheaper Deflation if people's income or their spending power is reduced, they will buy fewer products (imports) controls on wage increases, limitation of credit and hire purchase, increase in interest rates, increase in taxes Exchange control = the central bank places a limit on the quantity of currency foreign currency that can be purchased  the supply of domestic currency in the market is reduced  increase in the price of the currency Import control = use of tariffs and quotas tariff = a duty or tax on imports to increase their costs and discourage quota buying = numerical limit on the number of goods that can be imported