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CFA Level 1 - Chapter 5: Global Economic Analysis Now that we have discussed everything you need to know regarding micro and macroeconomics, let's broaden the scope to also include international trade, foreign exchange and the balance of payments.
Understanding how one country's economy and government reacts with other countries' economic activity is important because it helps analysts to determine the strength of economies around the world, as well as exchange rate movement.
A.TRADING WITH THE WORLD
I. Basics
A nation can gain from international trade when:
- Its relative costs of producing various goods differ from other nations
- It specializes in producing goods in which the nation is relatively efficient at producing and uses the proceeds from its output to produce goods for which it is relatively inefficient.
Note that these costs are relative to a country's opportunity costs. A country could have an absolute advantage in producing (able to produce more) over another country for all goods and still benefit from trade. How nations trade is determined by their comparative advantages.
Benefits of trade include:
- Better Quality of Goods - Domestic producers are forced to maintain and/or improve quality due to competition from foreign producers.
- Lower Prices Due to Economies of Scale - Because producers have larger potential markets due to international trade, they can sometimes achieve lower per-unit costs with large-scale production. Consumers benefit by being able to purchase the lower-priced goods. Manufacturers often benefit by being able to purchase parts at lower costs.
- Better Institutions and Government Policies - Global trade gives government policymakers incentive to create constructive economic policy. A failure to do so, however, will cause capital and labor to flow elsewhere
Next: CFA Level 1 - Production Possibility Curves
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