International Trade

Countries trade overseas in order to:

• Obtain those goods and services it cannot produce and which are required to make goods and services in domestic industry

• Benefit from a wider variety of goods and services

• Take advantage, where possible, of lower production costs and prices of some goods and services produced overseas

• Expand the markets for domestically made goods and services, so that domestic firms can grow in size and benefit from economies of scale 

Overseas trade not only involves the buying and selling of goods and services, but also trade in currencies necessary to make payments to foreign countries.

Goods and services bought from overseas are known as imports. An import, therefore, represents a flow of money out of the country. To pay for imports, firms must exchange national currency for foreign currencies. The sale of domestic currency will tend to reduce its market price or exchange rate.

Goods and services produced by firms and sold overseas are exports. The sale of exports generates a flow of money into the country. Foreign countries must buy local currency with their currencies in order to pay exporting firms. The demand for local currency tends to push up its exchange rate.

The balance of payments

The difference between flows of money into and out of a country is known as the balance of payments. If payments overseas exceed payments received from abroad, the balance of payments will be in deficit. The net outflow of money from Russia will tend to reduce the rubble exchange rate on the world currency markets.

There are three main categories of trade and international payments for trade:

• Visible trade. This involves trade in physical commodities, such as oil, machinery, foods, chemicals, cars, video recorders, etc. If payments for visible imports exceed payments made for visible exports, the balance of visible trade will be in deficit.

• Invisible trade. This involves international trade in services such as tourism, insurance, and banking. For example, if a Russian resident visits a foreign country on holiday, the money s/he spends there represents a flow of money out of Russia and so is classed as an invisible import. Conversely, if a foreign touring firm arranges Russian tours for its customers, the money paid into Russia are an invisible export.

Invisible exports also include inflows of interest payments on loans made overseas, profits from Russia-owned companies overseas, and dividends on shareholdings in foreign companies. Invisible imports include flows of interest, profits, and dividends paid overseas.

The balance of payments current account is a measure of international trading performance. If the total payment made for all imported goods and services in any one period exceeds the total payments received for visible and invisible exports, then the current account will be in deficit.

• Financial transactions. These are outflows of capital including loans and investments made overseas by Russian residents, firms, and government. Inflows are loans and investments in Russia by other countries. If inflows exceed outflows, then the balance of net financial transactions will be in surplus.

The balance of payments must, by definition, always balance. Thus, if the current account is in surplus, then net financial transactions must be deficit, and vice versa. For accounting purposes, a balancing item is included to account for any errors and omissions made during the collection and compilation of data on the many millions of overseas transactions of Russian exporting and importing organisations each year. 

Output per employee

The value of output per employee is an average measure of the productivity of labour. It is calculated in official statistics as follows:

Real Gross Domestic Product

Value of output per person employed =

Total number of employees

Increases in productivity will occur due to:

• The increased effort of the workforce

• Technological advance in equipment and production process

• The closure of inefficient plants and organisations

• Changes in working practices

Unit labour costs

Increases in productivity reveal nothing about the cost of production. If, for example, real wage costs (wage increases over and above inflation) have risen faster than productivity, firms will be less competitive.

Unit labour costs for the whole economy can be calculated by dividing the total wage bill for all employees by the total volume of output in the economy.