welcome to the Final Chapter you finally made it here to the last video of this current series that I am doing for the igc economics now this topic today is another microeconomic aim that a government must also take into consideration and that is international trade and globalization okay so when we talk about um you know just international trade and globalization I think the first thing that would come to your mind uh would be maybe the fact that we're dealing with stuff that's not within our economy right so stuff that's not dealing with our economy stuff that's outside our economy is what we're going to be kind of talking about in international trade and globalization so if that's what you thought then you are correct right and in this case we're going to be talking about everything dealing with that now if you remember in chapter 4 when we introduced the macroeconomic aims and I told you that chapter 4 five and six will then we'll be basically based on those um topics this is one of the top topics and we talked about imports and exports as part of the government aims and basically this is that topic right we are looking into not only our economy but other economies and how we can use other economies to improve our own economy okay because of something called specialization of different economies um and just to introduce this topic to you in a in a very easy way is that if I have country a and if I have country B and I I like using using these examples always is when I have country a and let's say country a specializes in making T But Country B specializes in making coffee now what this is is country a and Country B will basically use each other where country a gives B tea and B gives a coffee so it's kind of like a trade it's a trade okay and that's kind of what the first part means International Trade okay and that's just an example of what we're going to be talking about this is called International specialization okay we will come to what globalization is in just uh in in just later topics but for now we're going to be having a look at International Trade and the first part of this kind of chapter kind of just talks about the fact of international specialization okay so that was kind of the introduction that I wanted to uh bring you upon for this topic and we're going to start off by the definition of specialization and what is specialization and what did I just kind of talk about right now let's talk about it in terms of economics terms so here I said that specialization is when a nation concentrates its productive efforts on producing a limited variety of products or Goods right so limited goods and services now you might ask yourself why do they just produce these ones because of two reasons either they're very efficient in making those and they're very productive in making those and they have a greater advantage in those compared to other economies for example let's say my country has a gold mine so if I have a gold mine within my country then means most likely maybe my jewelry will be probably the most productive most efficient part or good that I can make and then other economies will buy that good of me and I as an economy can kind of um benefit of that and the most common example that we use in economics is the Middle Eastern countries concentrate their production on petroleum right because they have uh oil and gas reserves in their country and because they have that they have a big advantage and they can kind of distributed around the entire world because of the resources that they have okay now when we come under um this type of specialization there's two types um that are kind of come under this type of specialization and the two types of specialization um is determined based on two factors either the resource allocation meaning the one I talked about in uh in the Middle Eastern countries because of the resources they have can specialize and the other one is the cost of production so those are the two factors that we kind of determine um on how you can kind of Base your specialization or whatever so on so forth so let's look at the two types and the first part is called absolute advantage and what does this absolute advantage mean let's kind of put that right here absolute Advantage what it means is it's when a Sim it's when it's some some type of country or some type of economy is producing something more efficiently than another country by producing either more of a good or a more quality type of good okay so the more we usually kind of refer it in terms of more of a good okay so absolute Advantage is when you produce more of a certain more efficiently okay oops very laggy here some reason okay wow very very laggy sometimes I don't know why this app it does lag um but yeah I think you'll just have to bear it with me okay but absolute Advantage is basically when you produce some certain type of product more efficiently okay when you produce it more efficiently that's kind of when um we kind of say that this is um absolute Advantage okay so that's the first part of it right right is when you produce something more efficiently the second type of um you know thing we say is comparative advantage and comparative advantage is basically when a country can produce a certain type of good at a lower opportunity cost okay so you kind of categorize these two in these two different ways absolute Advantage is when you can produce a certain type of good more efficiently than another and comparative advantage is when a country can produce a good at a lower opportunity cost so those those are number one and number two so absolute advantage and comparative advantage now we kind of need to dwell into something called um the entire topic of this which is international specialization why do different countries and different economies specialize within themselves and why is it such advantage to every economy if they do that so let's look at over all the points on that and I'm just going to copy each one of the points and we're going to go through the highlighter and read through each point because a lot of in this topic is kind of just uh uh based on reading so that's the reason why um so let's see let's see if I if I'm able to okay um okay okay okay really trying to fit it all in one page um okay let's see U I think I'll just have to reduce the font and then we'll just look at it in that way okay wow still no W it's so I don't know okay um let's see I don't think I can okay it's fine I guess um okay wait I have a better idea I'm sorry guys for this but basically I just want to I think it' be easier okay it's fine whatever I'll just explain the points one at a time okay so let's start off with the first one and I'll just now just go to another page we'll just kind of discard the first one okay but the first one of the first Advantage is the economies of scale and efficiency and we've kind of talked about this in a previous um video not in relation to the countries or economies but we kind of know what economies of scale is and I'm hoping by now you kind of know what economies of scale is economies of scale what it means is basically when I'm a big economy or when I'm a large economy I can kind of benefit of that because just like specialization when a country can specialize at what they do the best this is economies of scale because I am a big country right so when a country is so massive when I increase the output of the entire country this will reduce costs and reducing costs of course causes the efficiency as well so that's the first advantage of international specialization like I say in every video I want you to open the notes aside and I want you to watch these videos alongside that because uh many times I don't post like I don't you know put all the notes onto the screen so maybe you can miss something out that maybe I missed out so I want you to read your notes as well and also kind of follow this video as you go that's the best way to approach these videos and I think I mentioned it in one of the videos before prior to this one okay um just so that because I'm kind of not pasting everything onto the screen but I'm rather just explaining the concepts that's what you actually are here for uh the next advantage of international specialization is the job creation so put that up here as well uh and here it simply says that a job creation um or what does this mean a job creation is basically that the specialization leads to increased output and remember we always link increased output with employment and therefore in increased output causes economic growth and econ economic growth causes a job creation job creation causes employment and also another thing that you could look or another route that you can look is that this could lead to a more Investments and thus the jobs are created okay so this is kind of aspect that you kind of also have to look at it does do job creation another advantage of using international specialization so so far we have had a look at two the economies of scale and job creation the third one is it allows more International Trade to take place what do I mean by that when I mean by International Trade what I simply mean is that this simply allows goods and services to be produced under the most efficient conditions because if I'm producing a certain good I want to be the most efficient in the way the resources are being used and all the countries can be benefited because I am certainly trading within each others okay so it's kind of like a benefit for everyone okay the next Advantage is the revenue to the government because remember if I'm selling Goods what's going to happen I'm kind of going to um because like as we said previously it creates jobs it creates Investments this all the tax the income tax is all going to go to the government because the government gets taxes from this and also increasing government revenue is always good for of course the government because they can kind of put back into the market okay the next advantage of uh having specialization is the fact that there is wider markets because the fact that I can do International specialization I can allow my products to go internationally and if it's an international market then therefore it's going to increase my market shares it's going to increase my market profits and I can kind of sell my certain products all over the World increasing the output increasing the market increasing the demand and so on and so forth so wider markets um which is always good for international specialization okay so that's kind of the advantages that we kind of look at there's one more which is consumer sovereignity which simply means that the consumers across the world can now buy high quality Goods which are more efficient and quality from different parts of the world and that's what it means that basically consumers get very good quality Goods because they kind of get the best coffee from this country they get the best chocolate from this country so on so forth so that is consumer sovereignity okay now with the advantages there are some disadvantages that we kind of have to also look at and the disadvantages involve the first one which is structural unemployment what does this mean now what this means is that this kind of um even though there's job There's jobs that are given out there is some type of um risk because for example um let's say in my economy there are people who make tea but now I found out that another country is more efficient in making tea so all those people who used to make tea in my economy will lose their jobs because I'm finding tea from outside cheaper and more effective than rather than buying tea from Air so basically those tea people will be kind of removed okay so that's causing uh structural unemployment okay and I'm hoping you know already what the what structural unemployment is but go check the video before this one I think uh yeah so for this uh the next one is the fact that there will be overe exploitation of resources um just like the other one if you remember when we were talking about specialization I think that was chapter 3 when we were just talking about specialization we kind of talked about the fact that there's going to be just one certain product again and again and again made again and again so there's going to be this same certain type of resource is going to be over exploited and since it is overe exploited that can be really bad because for example if oil is made a lot from my country and it suddenly becomes depleted I will kind of have nothing to sell in the future so that causes the overe explo of resources another disadvantage is the fact that there is threat of foreign competition which means that industries that are not specialized will always have a competition from foreign countries because they can kind of rule over them which is kind of really bad so there's always a threat of foreign competition okay and there's a few other two ones that are kind of not that necessary but the first one is risk of over specialization which means that if a country is so dependent on other countries that is always very bad because suddenly if another country kind of stops producing that good then the country can get into problems like for example there's a crisis in certain countries where uh during Wars they don't get the fuel right and then suddenly fuel prices become so high because there's so little limited fuel that it can kind of affect the economy so that means they're I'm heavily relying on other countries which is not that good okay so those are the advantages and disadvantages where we talk about International specialization uh let's go to the next topic and this next topic um is what we're going to now look at which is on globalization so remember um our topic uh this whole chapter talks about um international trade and globalization so now we're going to kind of answer the second part of this title which is globalization and what exactly is globalization and free trade and so on so forth okay so we'll start off by kind of introducing this thing and introducing this term called globalization and I would rather just paste it because it's kind of getting a bit laggy right now I'll fix that in future videos but okay globalization so globalization what does globalization mean globalization is simply when people companies and governments from different nations okay is basically aided by or driven by international trade and investment Okay so that could mean um that you might not be able to kind of understand that from now but globalization is basically when um it's basically an investment and it's aided by International Information um technology and you might not understand from now so I'm kind of just going to give an example and just jump into it globalization is simply when for example a certain type of company goes to different types of countries I'm kind of doing globalization because of the fact that I kind of have um I kind of have the the resources and the investment that will help me to start off scale my business and that's what globalization is now something that we kind of talk about in business studies is kind of linked to economics because we talk about something called the mnc's and we talk about this in the business studies I don't know if it's in your igcc syllabus for business studies but we talk about mnc's which are called multinational corporations and what are these types of things these things are businesses that have operations in more than one countries I can give many examples Starbucks Ikea Toyota dasas those all have businesses that are operated in several countries and if they are operated in seven countries then that means they are multinational corporation now why do countries scale in other countries because it's not always going to be a benefit because if I'm doing really well in my economy what must say that I will do well in the other economy so let's kind of look at the advantages and the disadvantages in terms of the government because remember we are still in macroeconomics so we're kind of still talking about the government in this so let's start off with the advantages in my home country what are the advantages of my home country so the advantages to the Home Country let's look at that one right here so the First Advantage to the home country is that mnc's will of course create opportunities for marketing right this is kind of easy this is s explanatory let's not waste time they create employe M opportunities which is again kind of self of course if I have a country if I have a business in my economy if I have a business in my country it's going to give workers to job because of course I need workers to run the business so that's going to create employment opportunities the next one it aids and encourages the economic growth why do we mean by this because remember that economic growth is always dealing with output and of course when um I have a certain type of business that is doing really well in my economy that means there's more demand there's going to be more more output and if there's more output that's going to kind of grow the economic growth okay there's going to be an economic growth and economic growth is really important for any type of country or any type of business because uh that is kind of the development of the Home Country okay which is always kind of an advantage as this the last one as it says the advantage of a home country is thatn uh mnc's help to maintain a favorable balance of payments now what does this mean and we're kind of going to go deeper into this in just a minute now what ises bance of payments mean now uh in just a later part of this video we're going to go very deep into what balance of payments are but balance of payments in a simple term is basically we're dealing with exports and imports okay now the government always cares about their exports the government always wants their exports to be more than their Imports because when if that is the case then that means now I want to Define what export and import is export is when I'm sending the product away from my country import is when I'm bringing uh the product to my country and you should already kind of know about this these terms that have are are used into day-to-day in in day-to-day like uses right we use these terms um a lot of time when we're talking about shipping I want to import something I want to export something so on so forth but I'm just going to explain it regardless so the government always cares about exports and why do they care about exports they care about exports because if it's exporting a good that means it's made in my country if it's made in my country that means a lot of people must be uh having jobs that are used in or involved in that product that are sending it also if it's exports I can kind of charge the country who is taking my product a certain fee which is also going to go towards the government so that's kind of what balance of payments are so if I uh have an MNC in my country in the Home Country it's kind of going to be favorable for the balance of payments if you kind of still don't understand what balance of payments mean we're going to be going deep into that later on in this video so don't worry about that that okay let's now have a look at the advantages to the host country what does it mean by host country for the host country I mean that for the host country you're kind of getting the MNC to your your country into your new country you're kind of getting an MNC to your country so let's now look at that so the first advantage of the host country is that it kind of provides significant employment and training to the labor force for example if I bring an MNC to another country I'm kind of going to also be teaching them the skills and stuff required to run that business so if I teaching them the required skills then that means that they kind of have an improved labor force and there's employment and training given by other people that's the first one the second one is there's a transfer of skills and expertise which means that because I'm kind of um developing my labor force and it's kind of linked with the point above here it's kind of linked with these two points but employment and training leads to getting skills getting skills into my workers is always good now an MNC can add to the GDP what is GDP we know this is kind of linked to the economic growth but when a business that comes into my country for example if Starbucks come to my country everyone suddenly wants Starbucks and therefore the output for Starbucks will kind of rise and I will kind of get tax from that as well which benefits the government and also the GDP will kind of rise the output Rises employment Rises so on so forth you can keep talking about that so that's the next one the next one is the competition from the mnc's act as an in intive for domestic firms to kind of improve if Starbucks comes and the other local coffee shops they're going to worried w't they so therefore they're going to try to produce even better quality Goods they're going to be producing it at a cheaper rate and therefore the competitiveness is always kind of good again there's disadvantages and we'll kind of come to that later on now mnc's kind of extend the customer and business Choice which means that if I get an MNC from another country so for the host country it's kind of going to be beneficial because I I am now giving my consumers different types of products a variety of products which is always kind of good okay I talked about this previously but tax revenues of course because I'm selling Goods in my country I'm going to kind of get tax as well from that so that's always also an advantage for the host country but let's look at the disadvantages now of Home Country and the disadvantages of host country and it's kind of like um it's not that difficult so let's look at those ones okay so let's start off with the disadvantage of host countries first or the Home Country sorry first of all the mnc's will transfer Capital to their home country which means that kind of this is really bad for the balance of payments again you might not understand what balance of payments are but we'll come to that but what this means is I'm transferring my entire capital from the Home Country right which is kind of not that good to various host countries which could be kind of expensive okay because capital is something like machinery and stuff now in order for my certain type of business to run I might need certain type of capital to run from different countries so basically I kind of have to give all my Capital to the host country okay the next one is that mnc's may not create employment because for example um if it employs labor from other countries perhaps because of better skills or lower costs it can kind of affect the home country because maybe it's going to start employing labor from other countries which is kind of not that good for the people of the home countries for example if I get my workers from other countries because they are much cheaper and they require less um salaries or wages then I'm kind of getting my my my employers from other uh places so it might not create employment within my home country and last but not least is mnc's May neglect the home country's industrial and economic development this was last chapter um Economic Development deals with living standards deals with poverty and deals with employment and unemployment employment and in fact one of the one of the economic development we've already kind of talked about here which is not create employment what about the disadvantages to the host country um the disadvantages to the host country uh is first of all that the businesses may not be able to compete with the mnc's for example um let's say I have an MNC right if I bring an MNC if I bring an MNC versus the local businesses maybe MNC like such as Starbucks is so good that all the other coffee shops cannot compete with an MNC so all the people in the local shop will kind of lose their jobs which is never good okay also something that could be considered is that MNC can be accused of imposing their cultures because MNC sometimes uh they come from different countries and they kind of impose their cultures which other people kind of don't like so that's also another disadvantage of the host country okay now um mnc's um also kind of find way to avoid tax because they kind of want to reduce the profits um on which they pay tax so they kind of find ways to dodge the country for the host country so the host country cannot kind of um kind of enjoy the tax and stuff like that so that's globalization globalization is simply the act of kind of moving within countries uh of their business so that's what we mean by globalization um now coming on to something called free trade and produ uh free trade and protection so that's also a very other important topic that we kind of need to talk about so in this like subtopic we kind of talk about globalization we talk about free trade and we talk about protection so let's start off by defining what free trade is and you kind of need to know it so free trade is when there are no restrictions for trade between the economies okay so simply like basically I'm allowed to do whatever I want between the economies and that is what free trade is protection on the other hand would be I'm guessing the opposite as you can guess it's the opposite right so meaning that there is limitations for that protection okay so those two are the um two opposites so let's start off with free trade and when we talk about free trade um we are simply going to look at the advantages and the disadvantages of the two and then for protection we're going to do the same and um we kind of are going to be analyzing that so let's start off with the advantages of free trade so when we look at the advantages of free trade um coming from the definition remember it says free trade is of course having no restrictions so one big Advantage for free trade is in fact that countries can benefit from specialization that means that if there is no limitation for any certain type of product then any country can kind of interact with any other country and specialize from each other so that's kind of the advantage of free trade next up you kind of need to look at the fact that because of this because it's so easy to move in in out of free trade there's going to be an increase in consumer choices so the first one again was the countries will benefit the second one the consumers will benefit because let's say you know the reason why not a lot of people kind of um bring products from other countries is because of the limitations for example you have to pay a tariff which we're going to be talking about in protection but with this case when there is free trade I can easily just get another product from another country right so I my of course my consumer choice will increase for example right now those people in in another country of course you must be like ah I wish this product was in my um country I wish it was in my country I want to get it but let's say now you can get it right of course my consumer choice will increase okay another advantage of free trade is the competition because now that I've finally got access to many countries I kind of can you know become more efficient and kind of increase my competition just so that I can kind of uh give my products to so many people in different countries okay another advantage of free trade is the fact that you can kind of have now business opportunities okay so there will be business opportunities because business opportunities or creates new business opportunities simply means that because now I can sell my goods overseas I can kind of grow my business and because if I think of it like that because I can profit a lot my profits will rise and I can grow my business and we've talked about the growth of a business profits is a big reason of growth of a business everyone wants profits and that is one reason why um that's a big Advantage for tree trade what about the disadvantages of free trade because there are also disadvantages that come with free trade and I'm hoping by now you kind of know what free trade is kind of properly because free trade is simply when I kind of when there's imports and exports between two countries the limitations between that kind of goes which is not the case in today's world and we'll come to what the case is for today's world and why it's implemented okay now the disadvantages of free trade is there's going to be reduced opportuni for growth in less development economies for example if my economy is very underdeveloped and I'm kind of heavily relying on other countries because of the free trade that's going to be a big big no for me right because when my economy is not that good and let's say I don't specialize on any type of product and I'm just getting all my products from other people then that means that there's going to be kind of no growth in that economy which is kind of bad okay another disadvantage of free trade is the fact that since it's very easy to to bring in and out products this is going to cause a rapid resource depletion and what does this mean by resource depletion resource depletion means because it's so easy to trade around different countries it's going to be so easy to make these products and constantly just give them out because I want more profit so there's going to be a rapid resource depletion and this is always not going to be good okay so that's another disadvantage over that okay so so those are the disadvantages let's look at protection okay and I'm hoping you kind of already know what free trade is and you can kind of guess what what are the advantages and disadvantages okay just look at it in the fact that okay I have no limitation to get any product what are the advantages of course consumer Choice uh business opportunities so on so forth but what about the disadvantage think of it as well in that way with protection what does protection mean let's kind of go over protection now and we'll start off with the definition of protection what is protection prote protection is the opposite of free trade with protection we kind of use trade barriers between the governments or the government sorry trade barriers by the government and the reason we do this is because we kind of want to eliminate competition and we kind of want to eliminate Market access as well and these trade barriers is and and we implement the protection using trade barriers so I'm going to go over each of the trade barriers there's not that many the first trade barrier is the tariffs okay so tariffs as the first trade barriers tariffs are simply indirect tax taxes that are imposed on imported and exported Goods now what does this mean tffs um simply means that if I have a product that is being made in my currently is made in my country currently then I kind of want it to be sold to other countries but I kind of want to benefit from that as well because I'm giving other countries my products I want to benefit from that so the government introduced something called tariffs and what that does is that when I'm giving out my product basically I'm kind of um going to put tax on that which is kind of very high and that's the reason why if I'm importing a car I have to pay so much tax on it because whichever person is making the car wants to benefit from why I'm taking it to my country okay so that is called tariffs the next one is subsidies which subsidies they do subsidies so that they kind of pay the companies just to not kind of um kind of not to um to buy inexpensive domestic Goods rather than Imports because sometimes consumers have no choice but to import if the products in the current economy is very expensive so therefore the government will start giving subsidies to the local companies so that every consumer does not need to import because remember in just coming up in this video we kind of talk about something called the balance of payments and the balance of payments always deals with exports and imports the government is always happy when there's more exports than Imports I kind of think of it like that so if the government is happy for more exports then there should be a lot of activ ities going on in my economy currently right that's kind of how you kind of think of it so if I want more stuff happening in my economy then that means I want to start doing stuff like subsidies right because I want to help the local economies or local sorry the local businesses in my economy to improve so I give them subsidies the next uh we call these trade buyers and the next one is something called a quota and aota is the number of limits you kind of have a a limit for how much Goods you can kind of remove so let's say uh there's a limit of only one car that you can do per consumer you can't do like 10 cars or 20 cars so there's quotas so these governments can kind of also implement it in that way so those are um quotas um the next trade barrier so that was kind of just self-explanatory but the next um next one is embargos and embargos is simply a complete ban of a certain type of product okay and um I can't think of any product that's certainly banned in some country I'm sure there is some um but yeah there's some type of product that's kind of maybe kind of banned um so that's called an embargo okay so that's um so that's basically protection and the reason why we do kind of protection is um so first of all there's several reasons is first of all the main reason for protection is because I want to kind of promote my local businesses I don't want everyone to kind of rely on different Industries and different economies I want people to focus on my own economy that is one reason or some of the reasons of why protection is very important our next one is um and you can go over your notes if you want more in detail I'm kind of covering it through but uh there's something called infant Industries Sunset Industries and strategic Industries infant Industries are those um industries that are kind of um just growing right they're small they're new and they want to grow so I want to protect them so Sunset Industries are those that are in the declining stage meaning um that they're kind of going down and because of unemployment they're kind of struggling and strategic Industries are basically stuff like transport energy defense so I want to uh do trade barriers to kind of protect all three of them okay and then we talk about trade imbalance which is simply we do protection so that my exports are greater than my imports which is a very very important concept of Economics exports greater than Imports always everyone is happy with when this is the case for the governments right exports greater than Imports always good and we're kind of going to be dealing with that right now in this next topic which is talking about foreign exchange rates but we kind of we'll go about um trade barriers in just a minute okay so let's put foreign exchange rate on another page and start with this topic okay so let's start off by defining what exactly foreign exchange rate is and I'm sure you must have heard this term um by a lot of people around so what is foreign exchange rate so the definition of a foreign exchange rate is simply the value or price of a currency expressed in terms of another currency that is the foreign exchange rate an example that i' would probably give you is for example if we have one pound here okay this maybe would equals to I don't know how many dollars maybe 1.2 or something 1 pound equals to $1.2 right so 1 pound equals to .2 this is the exchange rate so basically the price of one currency in terms of another currency is what we call foreign exchange rate okay I'm hoping that's what's clear now you might ask yourself why is this very necessary in economics and the reason why we talk about foreign exchange rate is because foreign exchange rate relies on two factors which is determined by the market demand and Supply in fact it's even a job which is called Forex and what this is is basically predicting the value so you buy so much of a certain type of currency that if the value goes up I can then cash back and get all the profit that I've got so it's kind of even a business it's like um stocks and stuff like that so it's something called Forex just to keep in mind so basically the mark the the foreign exchange rate is a currency of each currency is determined by the market demand and supply of the currency okay so it depends on the market demand okay so the market demand here for each economy of course depend per economy so for example of course the demand and supply for every different economy is different okay so that's what kind of um foreign exchange rate is uh just to bring you back to a concept that we talked about before which was equilibrium and equilibrium is simply when the price at which the demand and Supply uh of the currencies equals okay so you kind of even need to bring that into this part where we kind of talk about foreign exchange rate and the graph so if I just kind of um copy this image of the graph and paste it and to show you guys this is kind of the image that I'm talking about where at this point e there's simply something called the equilibrium price so at Point e there's an equilibrium price which connects from p and connects from Q so that gives an equilibrium price because at this point the demand curve and the supply curve kind of meet at that point which is called the equilibrium uh point but that's kind of not the main topic uh or main agenda of this topic we talk about why foreign exchange rates fluctuates now we know that uh of course it fluctuates because of the two main primary reasons which are demand and which are Supply but other than this what are the causes that actually make these exchange rates fluctuate and the reason we talk about this in macroeconomics is because the government kind of deals with this so let's now talk about the causes of um kind of an exchange rate causes of foreign um exchange rates so let's kind of talk about that first okay the first one um is the changes in demand for exports and imports and I'm kind of um going to introduce what again exports and imports are in just a minute because I've kind of used that term so much and I've kind of not maybe I I've kind of explained it but I'll explain it more so what does it mean by exports and what does it mean by Imports when I'm exporting something I am selling out a product or I'm getting some type of product out of my country to another country when I'm importing it's the opposite I am getting a product from another country now here is something called balance of payments a concept of balance of payments which we're going to be talking about shortly balance of payments is what the government cares about the government as I said always cares about exports being greater than Imports because the government always likes this when the exports are always greater than the Imports now in this case when a country's Imports are greater than the exports we call it a deficit okay this means that more of their currency is being supplied so basically the import is greater than export that means that the exchange rate of the so basically what means is that more of their currency is being supplied so more of currency being supplied now why is it more of currency supplied because I'm using my currency to to to buy other products that are coming so the Imports are greater than the exports are always bad because that causes a deficit if it causes a deficit what simply means is that the exchange rate of the current of the country's currency will fall okay and therefore the opposite of a deficit is a surplus a surplus is simply when the import is less than the export or the exports are greater than the Imports so when the exports are greater than the Imports we have a surplus and a surplus is what will make the exchange rate kind of Rise now you might be a bit confused about what is deficit what is Surplus what is this imp import export type of thing and we're going to be talking about the balance of payments in just a few uh minutes so stick with me and and um we kind of talk about that so the first cause of actually a foreign exchange rate fluctuating is from the exports and imports right the demand of these things you know how much is getting imported how much is getting exported so that is going to kind of be the first cause of a foreign exchange rate the next one is inflation which is actually the biggest kind of the most obvious one because what does inflation do inflation increases the price of a certain product so if the price of a country's products um on an international market will be higher than other Goods then simply means that the demand for the country's Goods will fall because everything in my country is so expensive and because it falls the currency demand will also fall making the exchange rate fall you see this the sequence again okay so inflation what does inflation do this is the rise in price of a product if there's a rise in the price of a product why will other countries so for example country a and Country B suddenly all my product have had a rise in a price because of inflation why will country be want to start buying expensive products from me of course they won't so therefore what will happen the currency demand will fall because they don't want my goods and the currency demand will fall will cause a fall in an exchange rate okay let's move on to the next cause of the foreign exchange rate the next one is the changes in interest rates so in interest rate of course we're always kind of dealing it with the banks um so if a country's interest rate Rises and remember um interest rate is dependent on many factors and in fact one of the government policies deals with interest rates so maybe that could be a reason why the interest rate fluctuates if that's what you're asking so if a country's interest rates Rises so interest rates Rises that means what happens people are going to start saving more saving more because I'm getting higher interest rates if I save more then what does this mean if I save more then the currency will rise and exchange it will rise okay so people are saving more so the demand for the currency will rise because the interest rate is R is going to rise but if in rates fall then kind of um the demand Falls as well causing exchange rate to fall okay now um something I was talking about previously was about speculation about a certain type of business or job that involves kind of predicting what happens to the exchange rate and that's kind of linked with this which is called speculation now foreign exchange Trader so these are actually it's a job that's what I was trying to say basically uh basically move around the money around the world right and basically what happens is they kind of use it to predict you know the according to the economy how well it is doing what is the confidence of the economy to basically start kind of handling the exchange rates for example if a certain economy is experiencing uh elections you know what happens during elections is that there's a lot of instability within the economy if there's a lot of instability sometimes the the the money or the The Exchange R gets affected because it's going to fall okay or it's going to rise okay depending on of course the country okay so if there's high confidence if there's very good confidence then that means that the foreign exchange rate is going to raise the raise of the foreign exchange rate but again if it's during elections it's kind of going to fall okay and the last factor is the government intervention because the government kind of can control a lot of these factors remember they can control inflation remember they can control interest rates so the government has a big big role in this and that's why we kind of are talking about it within government intervention is the government intervention in the foreign exchange rates affect the exchange rate of course it directly affects the exchange rate okay and they've given us example if there's a greater demand for British goods because of the rise in the value of the pounds then then I can start selling their reserves and to basically regulate The Exchange Market to regulate this Exchange Market and that's kind of uh what they do now uh when we talk about um foreign exchange rates we also need to start talking about the consequences of an exchange rate because it's not always good now there's two things that we kind of need to talk about in the consequences what happens when there's a fall in an exchange rate and what happens when there's a rise in an exchange rate so when we talk about let's say a fall in an exchange rate so here it's saying that when there's a fall in a foreign exchange rate what does this happen it causes the import prices to rise and the export prices to fall as simple as that okay so when there's a fall in exchange rate fall in exchange rate if there's a fall in exchange rate this causes import prices to rise import prices to rise export prices to fall okay when there which is not good actually if the import prices rise export prices fall not ever good okay and the other one is that a rise in the foreign exchange rate causes the import price so it's the opposite basically if there's a rise in the exchange rate then it kind of does this so it kind of does the opposite okay so in general in conclusion if there is a fall in the exchange rate if there is a fall in the exchange rate it's going to start making Imports expensive and exports cheap so what does that mean that the import demand in spending will fall because it's more expensive and Export demand in spending will rise okay and vice versa so you kind of can also link it with that so if there's a rise in exchange rate Imports are going to become cheaper so demand for imports are going to rise and exports uh export demand is going to fall kind of now later on we kind of will talk about something called balance of payments or trade balance and when there's a fall in a foreign exchange rate this will kind of improve the trade balance because it's going to reduce the deficits okay but we'll later on go to what trade balance is in just a moment let's kind of just stick to foreign exchange rate for now okay so let's now talk more about uh the two types of foreign exchange rates which is the fixed uh the floating foreign exchange rate and the fixed fore an exchange rate these are the two types of exchange rates and we're going to talk about kind of both of them right now so let's let start off with the floating foreign exchange rate when we talk about the floating foreign exchange rate this is the floating uh foreign exchange rate so when we kind of talk about this what do we we talk about first of all the floating foreign exchange rate this is a type of exchange rate that is dependent or is determined freely by market demand and supply and in fact this is the one we kind of use in our day-to-day lives okay so depending on the freely by the market depand this is freely done by the market demand so whatever happening with within the demand and Supply is going to kind of affect the foreign exchange rate okay now let's look at some of the advantages of using something like this so when we talking about the advantages and I'll quickly just discuss each of the advantages but however go over your notes and kind of go over each one so let's start off with the advantages the first thing is that there's autom uh it's automatic stabilization that means that any disequilibrium or anything like that is always going to be corrected right because of the markets of demand and Supply that is how market and demand markets um of Demands and Supply kind of work so anytime there's a deficit it's kind of going to be counter it just wants to be stable so that's how the market demand and Supply can kind of benefit this next it's going to free up internal policy and what do I mean by internal policy when I talk about internal policy is that the government kind of doesn't have kind of that big of a say in what happens to the foreign exchange rat so you can't kind of blame the government right because you don't have to kind of worry about balance of payments or imbalances because they're automatically kind of adjusted so this government kind of doesn't need to kind of regulate within this okay the government does not have to start doing like oh if the interest rates this what is AF to the foreign exchange the government does not have to be involved because remember the market is always kind of going to balance itself the Market's whole purpose is is to correct itself whenever there's a problem okay of course we have market failure and that's why we have the government but in this case right the market will kind of balance the demand and Supply okay the next one is that basically um it's insulated from external changes meaning that a foreign exchange rate of another country okay so if a Curr if a country is kind of it's not it's basically it it doesn't affect by external factors there's no external factors that are kind of affected with this right so it kind of insulates the country from inflation from anywhere else so if there's some problem happening in another country it's not going to affect my foreign exchange rate because I am independent of each other okay and last but not least another very big Advantage is you do not need foreign reserves and what does foreign reserves mean then you kind of can kind of um what what do they call it uh you can kind of research more on this but foreign reserves are simply when there is you don't need to reserve anything you do not need to deliberately change the exchange exchange rate and these reserves can therefore be used to import capital goods and stuff like that so you a reserve is simply you know in times when there's problems you kind of need to make changes to the exchange rate in order to maintain this okay but now we don't need to do this because in flirting exchange rate it's kind of all decided by the market demand now you might not be understanding this as clearly but it's fine because you know you kind of just mainly need to kind of cram the advantages even if you maybe not kind of understand that much that's kind of of course as a teacher I wouldn't want to say that but sometimes this topic can be really challenging because of how much uh you know extra wordies wordy wordiness do they have so therefore I think my my biggest um advice to you is just to crme the advantages and disadvantages let's look at the disadvantages with disadvantages so disadvantages so with the disadvantages the first one is there's uncertainty this is the biggest one so when there's uncertainty which means that since currency values fluctuate constantly because of the market it's currently fluctuating it's a lot of uncertainty then there will be a lack of investment lack of investment which simply means that because of this uncertainty uncertainty I'm not going to start doing Investments investments in what type of way investments in ways of of course like into the business and stuff like that third of all something called speculation speculation is basically day-to-day fluctuations it becomes much more tough right it becomes much more tough for speculations to actually happen because of how uncertain how random it is but it's in fact a job that's kind of created and last but not least there's a lack of discipline what does this mean lack of discipline means that you need to kind of maintain a discipline upon the economy but this is kind of absent with floating exchange rate because with this they could be short run problems because of something like domestic inflation and stuff like that could kind of be ignored in what happens to the exchange rate so that's kind of a disadvantage as well let's move on to the other type of exchange rate and this one is a more simpler one so the fixed foreign exchange rate is is now kind of what we're going to be talking about so fixed foreign exchange coming from its kind of wording and coming from what we already talked about it's basically fixed and it's controlled by the Central Bank okay now how will the Central Bank kind of intervene in this market it starts by intervening by buying and selling its currenty in the Foreign Exchange Market that's kind of how it works but it's all kind of managed by the Central Bank okay advantages of this is kind of the disadvantages of the other one we we'll keep it simple and and nice over here right advantages is there's going to be certainty because it's kind of being decided by the central bank so nothing is going to be fluctuating there's going to be a low inflation rate because of course um depreciation of any currency is depending on the inflation so because the inflation will be loow there won't be any depreciation there will be a balance of payment stability which we'll talk about but basically what this simply means is the exports and imports will kind of be balanced and will be in the favor of what the government wants and of course certainly because there is certainty Whenever there is certainty Whenever there is certainty you guys kind of need to kind know this there's usually Investments because you invest only when you kind of see a vision so certainty equals to Investments Investments are always good there's disadvantages because here there is kind of a risk of of um of conflicting with other macroeconomic objects uh objectives because remember we talked about the fact that the government now needs to intervene if the government needs to intervene they need to start kind of maintaining the exchange rate which can now make mean that you know if the government is involved in this it can start doing stuff like increasing interest rates start doing economic growth everything can be affected by what they do with the exchange rat so that could be kind of a problem but in the other one you know let the market just decide whatever it wants do okay with the fixed exchange rate it's also kind of hard because there's less flexibility because of like stuff like suddenly if the price of oil increases then it could be the the the country can be into big problems because it has a fixed exchange rate and since I'm getting products from elsewhere I kind of have to pay a lot of prices so that is kind of the disadvantages of a fixed foreign exchange rate so those are the two exchange rates and that's kind of the topic on exchange rates you kind of need to just know about kind of uh that type of stuff okay let's move on to the next and final subtopic of this course which is talking about balance of payments finally so I've been I've been referring to balance of payments almost throughout this entire like u l chapter what's balance of payments balance of payments balance of payments let's finally introduce what balance of payments are balance of payments is a record of all the monetary transactions between a residence of a country and the rest of the world in a given period of time what that simply means it's transactions between me and the rest of the world which simply means imports and exports in other words everything that I care about about imports and exports okay and we'll kind of start off this um topic with something called a current account okay and a current account what does a current account have so we kind of just Deep dive into this a current account has certain stuff it has these records it has what a visible trade is in Goods invisible trade in Services okay the net income received or made in payment for the use of the factors of production okay so now what do you need to know in this topic the main things you need to kind of know into this topic is what a current account deficit is and what a current account surpluses so I'm not going to waste your time talking about what the records are and so on and so forth what visible unvisible balance of trade so on so forth we're not going to talk about all that type of stuff you can go over the notes look at what this is but the two main things you kind of need to talk about are what are current account deficit and what is current account Surplus so that is all this kind of L chapter is and I'm going to be talking about both of them one at a time so let's start off with current account deficit so I'll start off with the current account deficit okay we'll start off by what this means what is a current account deficit okay current account deficit what is a current account this that what is what does this mean now basically when there's a current account deficit okay that simply means that um the financial outflows Financial outflows basically exceed the financial inflows what does this mean okay what does this mean this means there's a deficit so basically an account deficit is when I am kind of spending so much money outside my country and spending less money inside my country and that is what current account deficit is so this is when there's a current account deficit another word what you could say is when my when my when my imports are greater than my exports there is a current account deficit okay so that's what I'm kind of trying to say is is when I'm spending more money okay to kind of get stuff into my country I'm spending more money outside the country and I'm spending less within my own country that exactly is what we mean by exactly what it means right so this is exactly what we mean by a deficit and what we'll next next later on talk about which is what is a surplus okay so that is what deficit is okay so let's now talk about the next thing let's talk about what causes these things okay let's talk about all related to that let's talk about the causes of a current account deficit how does this deficit occur and why why does why are there more financial outflows against Financial inflows let's start off by talking about that okay let's go with that now now the first cause is if you ask yourself why do people import more why import why would someone want to import more than export think about that why would people start buying more stuff from outside if think of the reasons for that and that's going to give you all the causes the first one is a higher exchange rate now now we just talked about what a higher exchange rate is what a higher exchange rate simply does is that the currency is overvalued right the currency that I have is overvalued which means that my imports are cheap my imports are cheap and therefore there's going to be more Imports more Imports less exports because exports will become uncompetitive so if there is a greater Imports than exports then this is going to cause a deficit first thing first that's the first cause let's look at the second cause think about it in this way it's very simple if you think of it in this way why are people importing more than exporting let's look at the next one let's say there is an increase in the aggregate demand what happens when there's an increase in aggregate demand think about this we've talked about this many times we say that the economic growth increases right because there's an increase in aggregate demand because when if there's an increasing aggregate demand and like income increases that means basically people have more disposable income and so therefore they can consume Goods okay now let's say the aggregate demand is large it's big so many people have a high income but these producers that are in my economy cannot meet the de domestic demand what are people going to start doing they are going to start importing okay so when my own economy cannot handle this economic growth my own my my own economy cannot handle how much my consumption is then I'm going to start importing second reason is economic growth economic growth kind of causes more deficit let's look at number three and as I'm going through each factor I want you to notice how I'm comparing everything with imports and exports why is there more Imports compared to exports in both these factors you have noticed that people are importing more and that's all that's it kind of talked about this is kind of a difficult topic for those people who don't understand that concept next one decline in competitiveness what does this mean if the export Industries what does export Industries mean export Industries means my local businesses the business is where I live if those people are not able to compete with people from other countries then why should I buy products in my own country okay if my quality of these goods are so bad why should I buy it from here when I can of course import stuff so that's another reason why it can cause a deficit number four one number four factor is inflation inflation this makes exports less competitive right why would I if I have inflation think about it if I have inflation the price of goods in my own country in my own country is so high why should I buy from them because Imports are cheaper and therefore they're more competitive and and therefore I'm going to start importing think about it in that way another way to think about this is if there's a recession in other countries if there is a recession what do we said a recession in other countries means that there is negative economic growth if there is negative economic growth then they will start buying less of country's exports worsening the current account so if there's a recession then I'm going to start importing from those countries and the loss factor is borrowing money money okay loss factor is borrowing money increased uh or or or borrowing of the money borrowing money if countries are borrowing money from each other to finance the growth and stuff the deficits will also develop okay that's another reason because remember the main purpose of a current account deficit is when Financial outflows this is kind of the main thing Financial outflows are greater than financial inflows so that means if I as a country am asking for money from other people that means I'm kind of in debt so that kind of caus a current account deficit so these are how a deficit is caused now why is a deficit very bad for me why is a deficit so bad because a deficit can cause problems and we can start talking about all of that first of all a deficit will start causing a low aggregate demand why does it do this because of course I'm not going to start asking for products in my current local country so the demand for the products in my local country is going to fall so that's going to cause Eon it's going to cause basically a recession okay next there will be unemployment because if no one is making goods for me in in domestic Industries Why should there be employment in the industries that's very bad again this causes lower standards of living unemployment's low income low standards of living very easy to talk about that okay very very easy to talk about that now because there's more of this because there's more Imports because Imports are greater than exports what happens to this therefore the lower exchange rates there's lower exchange rates so therefore this causes lower exchange rates why does this cause a lower exchange rate is tied off with demand remember exchange rates are tied with demand and Supply so if there is a fallen demand for exports and there's a rise in demand for imports because remember this is the deficit so Imports are greater than exports right so therefore there's going to be a lower exchange rate which means that exports will become very expensive right because exports are going to start becoming expensive and whenever exports become expensive the foreign exchange rates are going to kind of reduce okay so stuff like that and imports and stuff like that will also which can cause a lot of problems right in in general low exchange rate is is always kind of bad okay now the last thing I want to kind of talk about with current account deficit is how do I fix this my government wants to fix this what does it do first of all if it's a floating exchange rate right it's going to correct itself okay it's going to corre it's going to correct itself because of the market it's going to find its way and correct Itself by either fixing the depreciation or fixing the the demand and the supply if it's a floating exchange rate another way to kind of boost it is use contractionary fiscal policy a government can start cutting the public expenditure increasing taxes what was this do reduce demand remember in a deficit the demand kind of is is kind of very high so I want to reduce this so I can kind of do that second is remember when we talked about tariffs if I Implement a tariff it's going to rise the price of the import so it's kind of can balance it because right now people are importing so much than in so what if I if I make my imports so high the tariffs become so expensive that people stop importing and they can only start export they can I mean they can only like they can only start um buying goods from local okay another way to fix current account deficit is use contractionary monetary policy because remember it's kind of linked with interest rate so if if a higher interest rate will start attracting more Investments remember higher interest rates in in in basically attract more Investments okay so those are ways to current uh to kind of fix the current account deficit now I want to use all this ways the way I thought of it okay and now the opposite when there's more exports causing more Imports is what we call a current account Surplus okay so this is kind of some work that I want to give you is the way I analyze the current account deficit I want you to go and kind of look at the current account Surplus okay and that's how you kind of make your notes and this topic is kind of it's just a it's a topic that you sometimes um you know you try to avoid picking because I remember back when I did my igcs I always used to be like you know what this chapter I kind of don't understand that much like sometimes it's easy but sometimes I kind of kind of avoid it okay because with this one it's kind of very technical you need to understand a lot about the government a lot about other countries so on so forth and as a teacher it's of course I don't like to say this but you try to avoid this type of question because it's much harder compared to the other topics okay in ways in a way that there's more cramming and there's more kind of understanding that's involved in this okay but I did try my best to explain what current account def deficit is and what current account surpluses is and how the foreign exchange rate is a very big important aspect of our economy and why the government really wants to talk about exchange rate because exchange rate is kind of uh in you know it deals with deficits okay so that is the end of of this chapter 6 and the end of this series um I wish you the best of luck in your exams and I'll see you in a future video so thank you guys for watching and I'll see you in the next one goodbye guys