Essay Sample on Types of Trade Flow

Paper Type:  Essay
Pages:  7
Wordcount:  1754 Words
Date:  2021-06-16

The concept of trade flow is common in international trade and describes the manner in which exports and imports flow in a given country engaging in international trade. Since international trade entails the selling and buying of services and goods between nation, trade flows describe how the services and flow. Trade flow is an umbrella encompassing a broad range of business elements, concepts, and direction of flow. Another common definition of the term trade flows is as Ostry (2010) uses it in measuring the balance of commerce which is a measure of how exports and imports exceed each other. Therefore, as a measure of gauging the balance of business, trade flows thus is the measure of the amount and value of the services and commodities that a given nation sells to other countries minus some services and products that the country imports. The calculation of the trade flows is a factor of all the global commodities transactions that form part of the countries trade balance (Ostry, 2010). It is a useful concept in commerce and trade in that it aid in the examination of commerce pattern, supply and value chains, the degree of diversification and trends in a good flow and hence enabling different destinations to make adjustments. There are two types of trade flows namely surplus business flow and deficit flow.

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Trade Surplus Flow

Trade surplus flow, it occurs when a nations exports exceed the imports hence that exporting countries becomes a net exporter. One condition that is necessary for the nation to be a net exporter is that it has to export more to the global clients than it can acquire from the international producers (Bussiere & Chudik, 2012). In the perspective of the world trade, net exporters will run a surplus trade flow because they will purchase a few goods in the international market and sell more to the global clients. Such a business flow has a significant influence on the demand for the nations currency in that net exporters since they run a surplus trade will have their money value rising as the international client before purchasing the goods and services will have to buy that money first. Therefore, the lesser the intake of imports, the higher the monetary value.

Certain characteristics explain the surplus trade flow. They include revealed competitive advantage (RCA), exports growth rate, domestic resource cost (DRC), and Michelaye index. First, revealed competitive advantage is the ratio of exports to import that a particular country exchange in the international market (Emlinger & Piton, 2014). A calculation of RCA value that leads to a figure more than or equal to 1 (>=1) shows that the nation has an advantage while anything that has a value less that less than 1 (<1) reveal the countrys disadvantage in trade flows (Helpman, 2011). Secondly, exports growth rate is the difference between the exports of two subsequent years of business expressed as a percentage of the first year. The figure from the comparative analysis of exports from the two years gives the percentage share that the nation occupies in the global market (Helpman, et al., 2010). For net export, the growth rate is positive, and it can show the control and the economic power of the nation in the world market.

Michelayes index, on the other hand, reveals the type of trade flow that country operates as it outlines the difference between the nations share in aggregate exports of a product and the countrys share in the imports of the similar product. The figures that originate from the calculation of the index ranges from -1 and one which can indicate whether a country is operating at surplus flow or not (Emlinger & Piton, 2014). Lastly, domestic resource cost (DRC) describes the trade balance measure of saving products, opportunity cost of production to international exchange in relations to real resources. For a sustainable business flow, there should be an added value to the domestic cost of goods and service production reflected in the international prices (Helpman, 2011).

Trade Deficit Flow

The trade deficit is another form of trade flows that occur when nations imports exceed the exports and the arrow if goods and services flow points at the country away from the international market. Net importers run a trade deficit. Trade deficit describes the inflow of more foreign goods into a country with little or no exportation. Unlike the surplus trade, trade deficit flow of goods and services causes a fall in the countrys local country (Baxter, 2010). The reason for the decline in the currency is that the nations will have to sell its currency to the international clients and buy foreign currencies which sometimes and be stronger than its money value. The countries that exercise such type of trade flow are called the net importers as they are the chief consumers of foreign products than they are the producers in the international market.

The parameters of the net importers such as revealed competitive advantage (RCA) are not appropriate. For instance, the RCA will be less than one which is a disadvantage (Emlinger & Piton, 2014). On the other hand, the exports growth rate is negative for the net importers while the Michelayes index will range from -1 to 0. Trade deficit brings the negative balance and is often the primary trigger of unfavorable balance which cost many nations trade gaps.

Japans Trade Flow

Japan operate with surplus flows in its respective trades. At present, Japan is among the global leaders of consumer goods exportation which is the key reason for its operation at the surplus net trade. As Bussiere and Chudik (2012) states, the type of commerce flow that a nation practice affects the currency value. For the case of Japan, the appreciation of its currency is because foreign countries that must purchase Japans consumer goods have to buy the currency first for covering the cost of the services and products. As a result of the increasing number of international clients, the demand for the Japanese yen increases. The currency in currently appreciating despite the new countrys policy of zero interest (Baxter, 2010). Even in severe economic situations, Yen is always stable such that the Japan can maintain the net surplus account to a tune of approximately three percent of its gross domestic product (GDP).

The 2015 imports and figures show that Japan is the chief exported with a trade surplus flow which makes that fourth leading global export economy. The total number of exports in 2015 were $670 billion while the inflow if imports were $589 billion (Observatory of Economic Complexity, 2016). As trade balance is total exports value minus the figures of total imports, then Japans trade balance is $81 billion which shows a trade balance which is positive hence a surplus trade flow. During the 2015 financial year, Japans per capita was approximate of $40.8 K with an aggregate GDP of $ 4.4 trillion. Among the top five, Japans import includes Cargo and Passenger ship worth $11.7 billion, industrial printers at $14.4 billion, vehicles spare parts at $30.3 billion, integrated circuits (ICs) at $30.6 billion and cars whose value is $93.6 billion. On the hand, the countrys five leading imports include computers worth $15.5 billion, packaged medicaments at $16.6 billion, integrated circuits at $17.4 billion, crude petroleum at $40.5 billion and gas worth $47.3 billion (OECD, 2015).

3. Balance of Trade

Japans Balance of Trade

2010 2011 2012 2013 2014 2015

Exports 766 847 802 739 714 671

Imports 634 786 797 755 754 589

GDP 5700 6157 6203 5155 4848 4383

Table 1: Japans GDP, Imports and Exports (all figures are in billion US dollars) (World Integrated Trade Solutions, 2016)

Table 1 shows that between 2010 and 2015, Japans exports and imports are varying, but the general trend is that between 2010s figures and 2015s, there is a decline in annual rate. It because the exports in 2010 were $766 billion while in 2015, the exports are $670 billion which an annual reduction rate of -3.4%.

On the other hand, Japans imports in 2010 are $634 billion while in their figure is $589 billion which is a significant reduction across the five years (OECD, 2015). The annual reduction rate is -1.8%. However, except in 2013 and 2014, the trade balance if the business is progressive. In 2010, the trade balance was $132 billion while it is 81 billion in 2015 Japan. Trade balance in 2013 AND 2014 are negative $ 16 billion and negative $40 billion respectively. Between 2010 and 2015, it is evident that except in 2013 and 2014, Japans balance of trade is positive which indicate a favorable trade balance. The favorable balance of commerce occurs in 2010, 2011, 2012 and 2015 where trade balance are $132 billion, $61 billion, $5 billion, and $81 billion respectively (OECD, 2015). 2014 and 2013 represent the period where Japans bilateral trade flows were unfavorable as the trade balance are $-16 billion and $-40 billion respectively. During such times, (2013-2014(, Japans international trade flow took the form of trade deficit as the imports are more than the exports by significant figures.

b. Relationship between GDP and Japans Exports and Imports

Figure 1: Japans GDP (2010-2015) (OECD, 2015)

It is evident from Figure 1 that Japans GDP was increasing between 2010 and 2012 before it steadily declines in 2013 progressively till 2010. Figure 2, on the other hand, shows that between 2010 and 2012, the value of exports and imports were rising steadily in Japan till 2013 when it starts to decline to the lowest figures in 2015. Similarly, Japans GDP falls steadily to the lowest value in the five-year period.

Figure 2: Japans Imports and Exports (World Integrated Trade Solutions, 2016)

According to Cameron (2010), a countrys gross domestic product (GDP) dictate the economic growth which positively impacts on the local investments, imports, and exports. It is worth noting that Japans exports and GDP are closely related because Figures 1 and 2 shows that when Japan was exporting more goods and importing few, as in the year 2011 ($847 billion), the GDP was higher ($6.1 trillion) across the five years. Exports are essential in the determination of the countrys GDP and thereby calculating the degree to which the citizens income or the country is reliant on foreign markets.

4. Sustaining Positive Net Exports

A country like Japan enjoying a positive trade balance can maintain the positive exports through voluntary imports restriction. One of the principal reason that can make Japan successful in the limitation of some imports into the country is the fact that it is a technologically savvy nation (Bahmani-Oskooee & Goswami, 2012). Therefore, the appropriate measure that it can use is the anti-dumping measure where the reception country imposes high standards the exporting countries cannot merge. Taylor (2013) considers anti-dumping that appropriate way of restricting the inflow of imports because it does stabilize not only the exports but also ensures an intake of high-quality products and services. The measure will block the importation of goods that is way below the production cost in the exporting countries. The strategy is only viable where a nation has superior technology and high dependency on the international market. For instance, Japan is a leading producer of integrated circuits (ICs) but is still an importer of the same materials. The an...

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