10. International Trade. Balance of Payments

The international trade is the oldest form of the international economic relationships. Nowadays it accumulates 4/5 of all international transactions. The contribution of the international trade to the development of the national economy is that it:

1) allows overcome the deficit of goods and services on the local markets;

2) promotes economic growth and creation of new jobs;

3) stimulates the development of international specialization of different countries.

It is also worth noting that all the forms of the international economic relationships (the migration of capital, the scientific cooperation, etc.) are finally realized in the form of the international trade.

The modern international trade has a number of specific features.

1) The range of goods involved in the international trade has become very diversified recently. For example, Germany, the USA and the UK are exporting more than 170 items of goods now.

2) The products of the manufacturing industry are occupying the first place in the commodity structure of the world trade. Their share is about 75%, whereas that of the mineral resources — only 12%.

3) Tourism and financial services are playing the key role on the world services market. The share of transport services has, on the contrary, decreased.

Nowadays about 70% of the world exports and imports fall on the developed countries and, first of all, the three biggest centers: the USA, the European Union and Japan. The role of Russia in the world trade has been reducing for the last several decades. In 1998 only 1% of the world exports and imports related to Russia.

The condition of the international economic relationships, including the foreign trade, between 7 an individual country and other states is revealed in the balance of payments. The balance of payments keeps the results of all the transactions between the residents of the country (individuals, firms and the government) and the rest of the world for the certain period of time (usually one year). The figures of the balance of payments help to choose the model of fiscal, monetary and currency policy as well as to manage the national debt.

The balance of payments includes 3 essential parts:

1) account of current operations;

2) account of the capital movement and financial operations;

3) changes of the official reserves. Finally comes the figure of total balance.

Account of current operations reveals the exports and imports transactions (and some other op­erations). An exports operation provides the income for the national economy, while an imports deal involves expenses for the state. The difference between these two indicators forms the trade balance of the country.

Account of the capital movement and financial operations reflects the inflow and the outflow of the capital in the national economy. The former represents the income and the latter — the expen­ditures of the country.

Changes of the official reserves are the result of the Central Bank's policy. This body may ei­ther extend or reduce the supply of currency on the foreign exchange market in order to control the rate of exchange of the national currency.

The balance of payments may be either active or passive.

The first situation occurs when the total income of the country exceeds its total expenses. In general such state of things is acceptable for the country. The only peculiarity is that there appears a probability of the conflicts with other countries, which have the negative balance of payments. The latter can, for example, put restrictions on the goods, coming from such states. If the balance is pas­sive, the total payments of the country exceed its total income. As a result, the national economy may become unstable; in addition to this, the problem of settling the national debt will become urgent. That is why a number of economists think that the income and payment in the balance of payments should balance in order to provide the best conditions for the national economy.

11. International monetary relations. Financial instruments. (EBB XV + Corbett Unit 5)

There are three main types of financial instruments in the world: cheque, bill of exchange and promissory notes.

Cheques are familiar to most people, because they finance nearly all domestic transfers. Bills of exchange are not so well known but are used extensively in the settlement of international trade. Promissory notes are acknowledgement of debt but without any specified date of repayment. The banknotes which banks continually handle are the most celebrated promissory notes of all. However such negotiable instruments like bills of exchange, cheques and promissory notes other than banknotes, are not money, although they perform very similar functions. Cheques and bills of exchange are the most important financial instruments that keep the wheels of commerce turning.

As bills developed before cheques came into general use, we will consider them first. Suppose A sells goods worth 1000$ to B, the contract stipulating that payment is to be made three month after the dispatch of the goods. 3 month – period of contract. In due course A drew a bill on B and sent it with the bill of lading and the insurance policy to B, who accepted it by signing his name vertically across the bill.

This bill is between two parties only. A is the drawer of the bill and, until he is paid, the creditor. B is the drawee of the bill, the person on whom the bill is drawn and, until he pays, the debtor. When he accepts the bill he is called the acceptor and the bill is called the acceptance. In this case A acts as a payee of the bill and the wording may be “Pay to the order of ourselves”, the “ourselves” being A. The words “value received” are often added to establish “value consideration” which is normally one of the essentials of a valid contract. More often there are three parties to a bill.

That is B owes A money as before, but this time A, when drawing the bill directs B to pay the money to P or his order. P becomes the payee of the bill and will eventually get the money until he passes the title on someone else endorsing it, i.e. negotiates the bill. If he simply writes his name on the back of the bill the latter will become payable to anyone who is in possession of it (the bearer), that is P endorsed the bill in blank. Blank endorsement (such bills are called bearer bills) involves great risk, as if the bill goes astray anyone can get the money. Special endorsement would specify the person to whom a bill or cheque is to be payable.

Where a bill is payable at a time in the future it is known as a term bill. So this was the case where three months’ credit had been agreed. If B, the drawee, is expected to pay immediately when he sees the bill no acceptance is needed and the bill which is payable at sight (or on demand) is called a sight bill.

A term bill or a bill payable after sight has to be presented twice, once for acceptance and once for payment. The bill can be dishonored at either of this stages (by non-acceptance or by non-payment) and protested.

Banks used to accept the bills on behalf of their customers who wanted their bills to be considered better and this led to the emergence of various accepting houses. The financial, institutions which specialize in buying bills at a discount are called discount houses. They buy bills, then collect the proceeds upon the day of maturity and make a profit.

A cheque is a special form of a bill of exchange, namely, one payable on demand and drawn on a banker. Cheques do not require acceptance.

Cheque is an order to the bank from a depositor of this bank for money to be paid out of his account. At the top of the cheque is printed the name and address of the bank branch of the account holder. It will make the payment ordered, once it has checked the balance or amount in the account, to make sure that there is enough money to cover the withdrawal.

Cheques like bills of exchange may change hands and are still good for payment. In this case the cheque holder signs or endorses the back.

The two vertical lines constitute a crossing which ensures that the cheque cannot be cashed at a bank but must be paid in for the credit of any account whether it be another bank account or a building society or savings account. Thus crossed cheques provide a safer means of payment than open cheques. There are two main types of crossing: general and special. A general crossing with or without the words “and Company” or “not negotiable” which means that the cheque must be paid into any bank account whereas the words “not negotiable” turn it into a nonnegotiable instrument and a person taking such a cheque shall not have and shall not be capable of giving a better title to the cheque than that of his transferor.

The effect of a special crossing is that the cheques can only be paid into an account with the specified bank or specified branch indicated on the crossing which it bears across its face. Sometimes a cheque may be crossed “account payee only”. Such cheques would never be paid into any account other than the payee’s. If it is not, the collecting bank is put on enquiry and should take steps to find out why it is being paid into another account.