Reading19 International Trade and Capital Flows

FinQuiz Notes – 2 0 1 9
1. INTRODUCTION

Investors must analyze following factors to identify Other factors from a longer-term perspective include
markets that are expected to provide attractive Country’s
investment opportunities:
• Stage of economic and financial market
• Cross-country differences in expected GDP growth development
rates. • Demographics
• Cross-country differences in monetary and fiscal • Quality and quantity of physical and human capital
policies, trade policies, and competitiveness. • Area of comparative advantage

2. INTERNATIONAL TRADE

2.1 Basic Terminology country or group of countries experienced better

(worse) terms of trade relative to the base year.
Difference between GDP and GNP:
Net exports = Value of a country's exports - Value of
country's imports
• Unlike GNP, GDP includes the production of goods
and services by foreigners within that country.
• Unlike GDP, GNP includes the production of goods • Balanced Trade: A trade is balanced when the
and services by its citizens outside of the country. value of exports = value of imports.
• Trade surplus: There is a trade surplus when the value
of exports > value of imports.
A country may have large differences between GDP o When a country has a trade surplus, it lends to
and GNP due to the following reasons: foreigners or buys assets from foreigners.
• Trade deficit: There is a trade deficit when the value
• A country has a large number of citizens who work of exports < value of imports.
abroad. o When a country has a trade deficit, it borrows from
• A country may earn less on the capital it own foreigners or sells some of its assets to foreigners.
abroad compared to what it pays for the use of
foreign-owned capital in domestic production. Autarky: It refers to a state in which a country does not
trade with other countries and all goods and services are
NOTE: produced and consumed domestically. It is also known
as Closed Economy.
Generally, GDP is a more widely used measure of
economic activity occurring.
Autarkic price: The price of a good or service in an
autarky economy is called autarkic price.
The terms of trade reflect the relative cost of imports in
terms of exports.
Open Economy: An economy that trades with other

  
 countries.
Terms of trade =

  


• In the absence of any trade restrictions, the

• If prices of exports increase relative to the prices of members of an open economy can buy and sell
imports, it indicates that the terms of trade have goods and services at the prevailing world market
improved which implies that now the country will be price (called world price).
able to purchase more imports with the same
amount of exports. Benefits of an Open Economy:
• Due to exports and imports of large number of
goods & services, the terms of trade of a country are
• Provides domestic households with a greater variety
usually measured as an Index number (normalized
of goods and services.
to 100 in some base year) i.e.
• Provides domestic companies access to global
markets and customers.
Terms of Trade (as an index number) = • Offers goods and services that are more

  


  

competitively priced.
• Provides domestic investors access to foreign capital
markets, foreign assets.
• When Terms of trade > (<) 100, it indicates that the
• Provides domestic investors access to greater

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Reading19 International Trade and Capital Flows FinQuiz.com

investment opportunities. Patterns and Trends in International Trade and

2.2
• Facilitates companies to take advantage of Capital Flows
economies of scale by providing them access to a
much larger market. The ratio of trade-to-GDP is used to measure the
• Reduces the monopoly power of domestic firms by importance of trade in absolute and relative terms.
increasing competition from foreign firms; also, due
to foreign competition, domestic firms are Foreign Direct Investment (FDI): FDI refers to purchase of
encouraged to become more efficient as physical assets or significant amount of ownership of a
compared to a closed economy. company in a foreign country (host country) by the firm
in one country (source country) to gain some measure of
management control.
Free trade: Free trade occurs when there are no
government restrictions on a country's ability to trade.
• A firm that engages in FDI becomes a multinational
corporation (MNC). MNC is a corporation that
• Under free trade, the equilibrium quantity and price
operates in more than one country or has subsidiary
of imports and exports are determined by the world
firms in more than one country.
demand and supply.

Advantages of FDI and globalization of production:

Globalization: Globalization refers to the "increasing
worldwide integration of markets for goods, services,
and capital”. In addition, it also refers to “increasing role • Increases business investment in smaller and less
for large corporations (multinational corporations) in the developed countries.
world economy and increasing intervention into • Provides smaller and less developed countries the
domestic policies and affairs by international institutions opportunity to participate in international trade.
(i.e. IMF, WTO, World Bank)”.
Disadvantages of FDI and globalization of production:
Refer to the fig below:
With no trade: • Due to increasing interdependence, countries’
exposure to global competition increases.
• E represents the autarkic equilibrium with price PA • Due to increasing interdependence, countries’ risk &
and quantity QA. At E, the quantity of cars return profiles have changed and are more
demanded = the quantity of cars supplied. affected by economic downturns and crises
occurring in other parts of the world.
With trade: • Trading relationships are becoming more complex
due to global supply chains.
A. The world price is P1. At P1,
Foreign portfolio investment (FPI): FPI refers to shorter-
• Quantity demanded domestically = QK term investment by individuals, firms, and institutional
• Quantity supplied domestically = QJ. investors (e.g., pension funds) in foreign financial
o Hence, domestic excess demand = QJ × QK. instruments i.e. foreign stocks and foreign government
o The quantity (QJ × QK) is met by imports. bonds. Unlike FDI, FPI does not involve obtaining a
degree of control in a company.
B. The world price is P2. At P2,
2.3 Benefits and Costs of International Trade
• Quantity demanded = QC
• Quantity supplied = QD.
o Hence, the domestic excess supply = QC × QD. Benefits of International trade:
o The quantity (QC × QD) is exported.
• Gains from exchange i.e. a country can receive a
higher price for its exports (hence, earns greater
profit) and/or buy imported goods at a price lower
instead of producing these goods domestically at a
higher cost.
• Facilitates economic growth (GDP) by increasing
the efficiency of resource allocation, promoting
learning by doing, increasing productivity,
knowledge spillovers etc.
• Provides domestic households with a greater variety
of goods and services.
• Provides access to larger capital and product
markets.
• Greater efficiency from increased competition.
• Facilitates specialization based on comparative
Reading19 International Trade and Capital Flows FinQuiz.com

advantage. for jobs in expanding industries.

• Facilitates flow of financial capital, which helps to
increase liquidity and output and lower the cost of It is argued that these costs occur in the short and
capital. medium term only; in the long-run, the resources (i.e.
• Increases the wages for unskilled workers (helps displaced workers) are likely to be more effectively (re-)
poor) when exports are concentrated in labor- employed in expanding export industries after some re-
intensive manufacturing. training. But the workers who remain in import-
• Promotes macroeconomic stability competing industry may be permanently worse off. Thus,
• Enhances productivity and growth by promoting even in the long-run, trade does not necessarily benefit
innovation, exchange of ideas, free flow of every stakeholder.
technical expertise, and factor accumulation.
• Facilitates companies with economies of scale and NOTE:
increasing returns to scale (e.g. automobiles, steel)
by providing them access to new markets for their Besides trade, other factors that affect economic
products because the average cost of production growth include:
falls as output increases in these industries.
• Increases awareness of changing consumer tastes • Quality of institutions, infrastructure, and education
and preferences in global markets. • Economic systems
• Facilitates development of higher quality and more • Degree of development
effective institutions and policies that encourage • Global market conditions
domestic innovation.
• Enhances the positive effects of foreign research
and development (R&D) because the benefits of
R&D in one country accrue to its trading partners. Practice: Example 1 & 2,
Volume 2, Reading19.
NOTE:
Although trade increases overall welfare, it does not
2.4.1) Gains from Trade: Absolute and Comparative
mean that every individual consumer and producer is
Advantage
better off; rather, trade creates winners and losers.
However, the gains from trade are greater than losses. Absolute Advantage: If a country is able to produce a
good at a lower cost or use fewer resources in its
Traditional trade models, i.e. Ricardian model and the production than its trading partner, it is said to have an
Heckscher-Ohlin model, focus on specialization and absolute advantage in producing that good.
trade based on the concept of comparative
advantage that results due to differences in technology Comparative Advantage: A country has a comparative
and factor endowments, respectively. advantage in producing a good if the opportunity cost
of producing that good is lower in the country than it is in
Newer models of trade focus on the gains from trade trading partner’s country.
that result from economies of scale, greater product
variety and increased competition. • When a country has a comparative advantage in
producing a good, it implies that it uses its resources
Intra-industry trade: It refers to a trade that occurs when most efficiently when it produces that good
a country exports and imports goods in the same compared to producing other goods.
product category or classification. Intra-trade benefits
countries because each country can focus on the
production and export of one or more varieties of the Example:
good and can import other varieties of the same good. Country A:

NOTE: • Can produce 4 machines a day or

In industries where there is "learning by doing," the cost • Can produce 8 yards of cloth a day
of production per unit falls as output increases because • Opportunity cost of 1 machine is 2 yards of cloth (i.e.
of expertise and experience acquired in the process of 8/4)
production. • Opportunity cost of 1 yard of cloth is 0.5 machines
(i.e. ½)
Disadvantages of Free Trade:
Country B:
• Trade may result in greater income inequality.
• Trade may destroy jobs in the industries that • Can produce 2 machines a day or
compete against imports. • Can produce 16 yards of cloth a day
• Unemployment increases when less-efficient firms • Opportunity cost of 1 machine is 8 yards of cloth
are forced to exit the industry. (16/2) i.e. has to forgo 8 yards of cloth to produce 1
• The displaced workers are required to be retrained extra machine).
Reading19 International Trade and Capital Flows FinQuiz.com

• Opportunity cost of 1 yard of cloth is 0.125 machines Autarkic Autarkic

(i.e. 1/8) Production Consumption
Total World
Machines 300 300
Data shows that:
Cloth 1200 1200
• Country A produces machines at a lower cost than
NOTE:
Country B, and hence has an absolute advantage
in the production of machines. Without trade, consumption of each product must equal
• Country B produces cloth at a lower cost than domestic production.
Country A, and has an absolute advantage in the
production of cloth. • World price of 1 machine is 4 yards of cloth.
• Country A has the lower opportunity cost than • In an open economy, Country A would specialize in
Country B in the production of machines and thus machine production and Country B would specialize
has a comparative advantage in the production of in cloth production. As a result,
machines. o Country A will produce 400 machines and no
o Thus, Country A should specialize in machines. cloth.
• Country B has a lower opportunity cost than Country o Country B will produce 1600 cloth and no
A in the production of cloth and thus has a machines.
comparative advantage in the production of cloth. o Country A exports 160 machines to Country B in
o Thus, Country B should specialize in cloth. exchange for 640 yards of cloth.
• International trade will benefit both countries even if • After trade, the Country A consumes 240 machines
they have absolute disadvantage in producing any and 640 yards of cloth. Consumption in the country
of the goods. Because countries can benefit by A increases by 40 machines and 240 yards of cloth.
exporting the goods in which they have • Similarly, Country B consumes 160 machines and 960
comparative advantage. yards of cloth i.e. an increase of 60 machines and
160 yards of cloth.
Important to understand: • World production and consumption is now 400
machines and 1600 yards of cloth. Hence, post-
• If country A can sell a machine for more than 2 trade production and consumption exceeds the
yards of cloth and if country B can produce a autarkic state production and consumption by 100
machine for less than 8 yards of cloth, both countries machines and 400 yards of cloth.
would benefit from trade.
• Both countries would gain from trade as long as the
world price for a machine in terms of cloth lies
Practice: Example 3,
between the autarkic prices of the trading partners
Volume 2, Reading19.
i.e. between 2 and 8 yards of cloth.
• The further away the world price of a good or
service is from its autarkic price in a given country,
the more that country gains from trade e.g. Production Possibilities Frontier (PPF): The production
o If Country A can sell a machine to Country B for 7 possibilities frontier is a graph that shows the
yards of cloth (i.e. closer to Country’s B autarkic combinations of output (e.g. cloth and machinery) that
price), it would gain 5 yards of cloth per machine the economy can possibly produce given the available
sold to Country B compared with its own autarkic factors of production (i.e. capital and labor) and the
price (with no trade) of 1 machine for 2 yards of available production technology. (Refer to fig below).
cloth.
o If Country A can sell a machine to Country B for 3 • The slope of the PPF at any point represents the
yards of cloth (i.e. closer to Country’s A autarkic opportunity cost of one good in terms of the other.
price), it would gain only 1 yard of cloth per • The PPF is concave to the origin which indicates
machine sold to Country B compared with its own increasing opportunity cost e.g. in terms of machines
autarkic price (with no trade) of 1 machine for 2 as more cloth is produced and vice versa.
yards of cloth. • The maximum (optimal) production occurs at a
point where the slope of the PPF equals the relative
Autarkic Autarkic price of the goods.
Production Consumption • PA represents the autarkic price line.
Country A • The slope of the autarkic price line represents the
Machines 200 200 opportunity cost before trade.
Cloth 400 400 • PA is tangent to the PPF at point A.
Country B • Point A reflects the autarkic equilibrium.
Machines 100 100
Cloth 800 800 In autarky:
Reading19 International Trade and Capital Flows FinQuiz.com

• Country A produces and consumes 60 machines technology, the discovery of natural resources (e.g.
and 60 thousand yards of cloth. oil).
• Country A lies on indifference curve I.

With trade:
Practice: Example 4,
Volume 2, Reading19.
• Country A and B will face the world price line P*.
• World price line P* is tangent to the PPF at point B.
• Hence, due to the change in relative prices of the
goods, Country A is encouraged to increase the From an investment perspective, analysts and investors
production of the good in which it has comparative must analyze the following factors:
advantage (i.e. machines) and produce at point B
instead of point A. • Country's comparative and absolute advantages
• At point B, Country’s A production of machines has and changes in them.
increased to 120 units and production of cloth has • Changes in government policy and regulations.
reduced to 30,000 yards. • Changes in demographics, human capital, demand
• Also, post-trade, Country A consumes at point E conditions.
(which lies on P*, outside the PPF), which lies on a
higher indifference curve (III). Hence, trade 2.4.2) Ricardian and Heckscher-Ohlin Models of
increases welfare of Country A. Comparative Advantage
• It exports 80 machines to Country B and imports
80,000 yards of cloth from Country B. According to Adam Smith, a country can gain from
• P* is also called the trading possibilities line because trade if it has absolute advantage in the production of a
trade occurs along this line. good.
• The slope of the line P* represents the opportunity
cost of a machine in terms of cloth in the world According to David Ricardo, a country can gain from
market. trade if it has a comparative advantage in the
• At price P*, trade is balanced i.e. the export of cloth production of a good even if it does not have an
from Country B equals the import of cloth into the absolute advantage in the production of any good.
Country A and the export of machines from Country
A equals the import of machines into the Country B. Ricardian Model: According to the Ricardian Model,
differences in productivity of labor between countries
cause productive differences which leads to gains from
Conclusion:
trade.

• A country can increase its welfare by specializing in

• Hence, under Ricardian model, the source of
the good in which it has a comparative advantage.
comparative advantage is the differences in labor
productivity.
• Differences in labor productivity are usually
explained by differences in technology.
• This model is based on only one factor of production
i.e. labor.

Assumptions of the Ricardian model: Only labor is the

variable factor of production.

Criticism: Differences in technology can be a major

source of comparative advantage only at a given point
in time because the technology gap can be closed by
other countries or they can gain a technological
advantage.

Heckscher-Ohlin Model (also known as factor-

proportions theory): According to Heckscher-Ohlin
Source: Volume 2, Reading19, Exhibit 10. Model, differences in factor endowment i.e. labor, labor
skills, physical capital and land between countries can
A country's comparative advantage is not static; rather, cause productive differences and leads to gains from
it can change over time as a result of following factors: trade.

• Structural shifts in the domestic economy. • Hence, under Heckscher-Ohlin model, the source of
• Shifts in the global economy. comparative advantage is the differences in the
• Accumulation of physical or human capital, new relative factor endowments.
Reading19 International Trade and Capital Flows FinQuiz.com

• This model is based on two factors of production i.e. As a result,

labor and capital.
• Incomes received by each factor of production
Assumptions of the Heckscher-Ohlin Model: change; because demand for factors used to
produce export goods ↑, whereas demand for
factors used to produce the import goods ↓.
• Both capital and labor are variable factors of
production.
• There are homogeneous products and It is important to understand that:
homogeneous inputs.
• Technology in each industry is the same among • When trade is opened, the relatively cheap good
countries, but it varies between industries. and the relatively cheap factor of production both
get more expensive in each country.
According to the Heckscher-Ohlin theory, • Trade positively affects the abundant factor and
negatively affects the scarce factor.
• If there is free trade, then the absolute and relative
• A country has a comparative advantage in goods
factor prices will be equal in both countries provided
that use intensively its abundant factor. It will export
that all assumptions of the Heckscher-Ohlin hold.
that good which uses intensively its abundant factor
However, in the long-run, factor prices tend to
and will import that good which uses intensively its
converge.
scarce factor.
• A country has relatively abundant (scarce) capital if
the ratio of its endowment of capital to labor > (<) its NOTE:
trading partner. This implies that: Both the differences in technology and differences in
o A country where capital (labor) is relatively factor abundance are complementary, not mutually
abundant would export relatively capital (labor) exclusive.
intensive goods and import relatively labor
(capital) intensive good. NOTE:
• Since this model is based on two production factors,
it may allow income redistribution through trade i.e. The demand for an input is called a derived demand
when a country starts trading, the price of the because it is derived from the demand for the product it
o Export good increases. is used to produce.
o Import good decreases.

3. TRADE AND CAPITAL FLOWS: RESTRICTIONS AND AGREEMENTS

Trade restrictions (or trade protection) are government Domestic content requirements: Domestic content
policies that are used to impose limits on the ability of provisions are a regulation that requires that some
domestic households and firms to trade freely with other specified % of a final good be produced domestically.
countries. Examples of trade restrictions include: This % can be specified in physical units or in value terms.

Tariffs: Tariffs are taxes levied by a government on Rationale behind imposing Trade restrictions:
imports.
1) Protecting established domestic industries from
Import quotas: Quota is a direct quantitative restriction foreign competition.
on the amount of a good that can be imported into a 2) Protecting new industries from foreign competition
country (generally for a specified period of time). (a.k.a infant industry argument).
3) Protecting and increasing domestic employment.
Voluntary export restraints (VER): It is a trade restriction 4) Protecting strategic industries for national security
under which the exporting country agrees to limit its reasons.
exports of the good to its trading partners to a specific 5) Generating revenues (i.e. through tariffs).
number of units. VER is similar to import quotas; but unlike 6) Retaliation against trade restrictions imposed by
quotas, it is imposed by the exporting country. other countries.

Export Subsidies: They are direct payments (or the

Capital restrictions: Capital restrictions are limits imposed
granting of tax relief and subsidized loans) paid by the
on foreigners' ability to own domestic assets and/ or
government to the domestic exporters or potential
domestic residents' ability to own foreign assets.
exporters.
Trade restrictions v/s Capital restrictions:
Embargoes: Embargo is a prohibition on trade in a
particular good.
• Trade restrictions limit the openness of goods
Reading19 International Trade and Capital Flows FinQuiz.com

markets. • Domestic production increases to Q2.

• Capital restrictions limit the openness of financial • Domestic consumption declines to Q3.
markets. • Imports reduce to Q2Q3.
As a result of these price changes:
3.1 Tariffs
• Consumers lose in the importing country and gain in
the exporting country.
Tariffs are taxes levied by a government on imports. • Producers gain in the importing country and lose in
the exporting country.
Objectives of tariffs: • Government imposing the tariff gains revenue.

• To protect domestic industries that produces the When a small country imposes a tariff:
same or similar goods.
• To reduce a trade deficit.
• Consumer’s surplus decreases due to increase in
price.
Disadvantages of tariffs: Consumer loss = A + B + C + D
• Producer’s surplus increases due to increase in price.
• Tariffs increase the price of imports above the free Producers gain = A
trade price; as a result, demand for imported goods • Government revenue increases i.e. the government
falls. gains tariff revenue on imports = Q2Q3. It is
• Tariffs reduce the overall global welfare. represented by area C.
• Triangle B and D reflects efficiency loss because
In this context: tariffs distort incentives to consume and produce.
o Triangle B reflects production inefficiencies i.e.
Small Country: A small country refers to a country that is inefficient producers with cost of production > P*
a price taker in the world i.e. it cannot influence the exist in the market and leads to inefficient
world market price. allocation of resources.
o Triangle D reflects consumption inefficiencies i.e.
• Trade barriers generate a net welfare loss in a small consumers are now unable to consume the good
country. due to higher prices.

Large Country: A large country refers to a country that is

a large importer of the product and can influence the
world market price. Trade barriers can generate a net
welfare gain in a large country provided that:

• It imposes an even larger welfare loss on its trading

partner (s).
• It does not face retaliation from its trading partner.
• The benefits of improving its terms of trade are
greater than the deadweight loss as a result of the
tariff.

Refer to fig below:

Under Free trade: The net welfare effect = consumer’s surplus loss +
producer’s surplus gain + government revenue
• World price (free trade price) = P*.
• Domestic supply = Q1. Deadweight loss to the country's welfare =B + D
• Domestic consumption = Q4.
• Imports = Q1Q4. • Deadweight loss occurs when loss in consumer
surplus > sum of the gain in producer surplus and
Under Tariffs: government revenue.

• Per-unit tariff imposed = t.

• Due to tariffs, domestic price = world price + per-unit Practice: Example 5,
tariff = P* + t = Pt. Volume 2, Reading19.

Note: A tariff imposed by a small country does not

change the price in the exporting country.
Reading19 International Trade and Capital Flows FinQuiz.com

3.2 Quotas • Under VER, all of the quota rent is captured by the
exporting country, whereas under import quota at
least some part of the quota rent may be earned by
A quota is used to restrict the quantity of a good that
local importers.
can be imported into a country, generally for a specified • VER produces a greater welfare loss to the importing
period of time. This restriction is usually enforced by
country than import quota.
issuing licenses to some group of individuals or firms.

• Due to import quota, foreign producers increase the 3.3 Export Subsidies
price of their goods.
• The profits received by the import license holders Objective of export subsidies: To stimulate exports.
(foreign producers) are known as quota rents.
Disadvantage of export subsidies: They reduce welfare
In the fig below, by promoting production and trade that is inconsistent
with comparative advantage.
• Import quota = Q2Q3.
• Domestic price after the quota = Pt (same as the Countervailing duties: Duties that are imposed by the
domestic price after the tariff t was imposed). importing country against subsidized exports are referred
• Quota rent is represented by Area C. to as countervailing duties.

Under export subsidies:

Welfare loss to the importing country = B + D + C
Exporter receives = International price + per-unit subsidy
• Under a quota, the welfare loss > than under an for each unit of the good exported
equivalent tariff.
• The welfare loss will be same under quota and tariffs • It incentivizes exporters to shift sales from the
only when the government of the country that domestic to the export market.
imposes the quota can capture the quota rents by
auctioning the import licenses for a fee i.e. it will be As a result,
equal to areas B + D.
• In case of small country, the price of a good in the
domestic market/exporting country increases (i.e.
Price = Price before subsidy + subsidy). The net
welfare effect is negative.
• In case of large country, the world price falls as the
large country increases exports and part of the
subsidy is transferred to the foreign country (i.e.
country’s terms of trade deteriorates). The net
welfare effect is negative and is larger than that of
small country case.

Tariffs v/s Import Quotas: Under export subsidy,

• The revenue generated from a tariff is collected by • Consumer surplus decreases.

the government. • Producer surplus increases.
• The revenue generated from quotas is collected by • Government revenue also decreases.
the holders of import licenses.
• Under import quotas, an increase in demand will
result in a higher domestic price and greater
domestic production compared to an equivalent
import tariff.
• Under import tariffs, an increase in demand does not
change the domestic price and domestic
production; rather, it results in higher consumption
and imports compared to an equivalent import
quota.
• Unlike quotas, effect of tariff is uncertain.

Voluntary export restraint (VER) versus Import Quota:

• Import Quota is imposed by the importer, whereas

VER is imposed by the exporter.
Reading19 International Trade and Capital Flows FinQuiz.com

Panel A: Effects of Alternative Trade Policies

Tariff Import Quota Export Subsidy VER

Impact on Importing country Importing country Exporting country Importing country
Producer surplus Increases Increases Increases Increases
Consumer surplus Decreases Decreases Decreases Decreases
Government Increases Mixed (depends on Falls (government No change (rent to
whether the quota spending rises) foreigners)
rents are captured by
the importing country
through sale of
licenses or by the
exporters)
National welfare • Decreases in small • Decreases in small Decreases Decreases
country country
• Could increase in • Could increase in
large country large country

Panel B: Effects of Alternative Trade Policies on Price, Consumption, Production, and Trade

Tariff Import Quota Export Subsidy VER

Impact on Importing country Importing country Exporting country Importing country
Price Increases Increases Increases Increases
Domestic Decreases Decreases Decreases Decreases
consumption
Domestic Production Increases Increases Increases Increases
Trade Imports decrease Imports decrease Exports increase Imports decrease

Source: Volume 2, Reading19, Exhibit 13.

Regional Trading Bloc: A group of countries that have
Practice: Example 6,
signed an agreement to get the benefits of free trade
Volume 2, Reading19.
by removing tariffs and quotas between themselves
while retaining the right to set tariffs and quotas towards
non-members.
Changes in the Government's trade policy may affect:
Types of Regional Trading Blocs:
• Pattern and value of trade 1) Free trade areas (FTA): A free trade area allows free-
• Industry structure trade among members. However, each member can
• Profitability and growth of firms because changes in have its own trade policy towards non-member
trade policies affect: countries.
o Goods a firm can import/export
o Demand for its products Example: The North American Free Trade Agreement
o Pricing policies (NAFTA) creates a free trade area. Its members
o Production costs due to increased paperwork, include United States, Canada, and Mexico.
procurement of licenses, approvals etc.
2) Customs union: A customs union allows free trade
Trading Blocs, Common Markets, and Economic among members and also requires a common
3.4 external trade policy against non-member countries.
Unions

Important examples of regional integration include: Example: In 1947, Belgium, the Netherlands, and
Luxemburg ("Benelux") formed a customs union.
1) North American Free Trade Agreement (NAFTA)
3) Common market: A common market incorporates all
2) European Union (EU)
aspects of customs union and also allows free
movement of factors of production (especially labor)
among members.
Reading19 International Trade and Capital Flows FinQuiz.com

Example: The Southern Cone Common Market producer surplus and government tariff revenue falls.
(MERCOSUR) of Argentina, Brazil, Paraguay, and Hence, trade creation results in net increase in
Uruguay. welfare.

4) Economic Union: An economic union incorporates all

2) Trade diversion: Trade diversion occurs when regional
aspects of a common market and also requires
integration leads to the replacement of low-cost
common economic institutions and coordination of
imports from non-members with higher-cost imports
economic policies among members.
from member countries.
Example: The European Union.
• Trade diversion reduces welfare.
Monetary Union: When the members of the economic
union decide to adopt a common currency, it is Example: Suppose, Country A and Country B are
referred to as a monetary union. members of a regional trading bloc, whereas Country C
is not.
World Trade Organization (WTO): The WTO is a
negotiating forum with objectives to eliminate trade • Before the RTA, Country A has in place a specific
barriers (both tariff and non-tariffs) between countries (per unit) tariff on imports from both Country B and
and to settle trade disputes among countries. Under Country C.
WTO, all countries treated on most favored nation (MFN) • Assume Country C is now the lower-cost producer in
basis. comparison to B.
o Country A imports the good from Country C.
Regional integration v/s multilateral trade negotiations • Once Country A joins a regional trading bloc with
under WTO: Country B, however, Country A switches to Country B
as an import supplier. → Imports expand as the
• Relative to multilateral trade negotiations under domestic price falls.
WTO, regional integration is popular and easy to • Consumer surplus in Country A increases while
implement because it is easier, politically less producer surplus and government revenue falls
conflictual, and quicker to eliminate trade and • Whether net welfare effect is positive or negative, is
investment barriers among a small group of ambiguous i.e.
countries. o If trade-diverting effects > trade-creating effects,
• Unlike WTO, regional integration results in preferential then regional trading bloc will reduce welfare in
treatment for members compared with non- Country A.
members.
• Regional integration can change the patterns of Advantages of Regional Trading Blocs:
trade.
• By eliminating or reducing trade barriers against
Effects of forming a Regional Trading Bloc (e.g. Custom each other, member countries can allocate
Union): resources more efficiently.
• Other advantages are the same as that of free
1) Trade creation: Trade creation occurs when regional trade e.g.
integration leads to replacement of high-cost o Greater specialization
domestic production by low-cost imports from other o Reduction in monopoly power and prices due to
members. foreign competition
o Greater choices available to consumers
• Trade creation increases welfare. o Economies of scale from larger market size
o Improvements in quality due to the exposure to
Example: Suppose, Country A and Country B are more competition
members of a regional trading bloc, whereas Country C o Learning by doing
is not. o Technology transfer, knowledge spillovers
o Encourage FDI
• Facilitates members to negotiate better trade terms
• Before the RTA, Country A has in place a specific
with the rest of the world than as individual nations.
(per unit) tariff on imports from both B and C.
• By promoting greater interdependence among
• Country B is the lower-cost producer in comparison
members, it helps to reduce the potential for
to Country C.
conflict.
o Therefore Country A imports good from Country B.
• Increases labor mobility and hence help reduce
• Once Country A joins regional integration with
unemployment in member countries.
Country B, tariff is removed on imports from Country
• Strong growth in any RTA country can accrue other
B. Good continues to be imported from Country B
RTA member countries.
and imports increase because price has fallen due
• Enhances the benefits of good policy and lead to
to removal of tariff.
convergence in living standards.
• Consumer surplus in Country A increases while
• Provides greater currency stability.
Reading19 International Trade and Capital Flows FinQuiz.com

Disadvantages of Regional Trading Blocs: Inward Capital restrictions include:

• Regional integration may result in less-efficient • Restrictions imposed on foreigners to invest in the
allocation of resources and decrease in welfare due domestic country.
to trade diversion. • Limits on inward investment by foreigners i.e. amount
• They may encourage mergers and takeovers that they can invest in the domestic country and/or
resulting in greater oligopolistic collusion. type of industries in which capital can be invested.
• They create adjustment costs arising from job losses
e.g. when inefficient firms exit the market due to Restricted capital outflows refer to limits imposed on the
import competition, unemployment increases. purchase of foreign assets or loans abroad. Outward
However, it is viewed as a temporary phenomenon. Capital restrictions include:
But when workers remain unemployed for a long
period, they may face long-term losses.
• Restrictions placed on foreigners on repatriation of
• Differences in tastes, culture, and competitive
capital, interest, profits, royalty payments, and
conditions among members of a trading bloc
license fees.
reduce the potential benefits from investments
• Restrictions imposed on citizens to invest abroad
within the bloc.
particularly in foreign exchange, scarce economies.
• Problems faced by individual member countries may
• Deadlines placed on citizens regarding repatriation
quickly spread to other countries in the bloc.
of income earned from any investments abroad.

Challenges in the formation of Regional Trading

Reasons for governments to restrict inward and outward
Agreements (RTA):
flow of capital:
There are at least two challenges in the formation of an
RTA i.e. • To meet objectives regarding employment or
regional development.
1) It is difficult to form an RTA due to cultural differences • To meet strategic or defense-related objectives.
and historical considerations (e.g. wars and conflicts). • To exercise control over a country's external
2) Countries are hesitant to form an RTA due to their balance.
preference to pursue independent economic and • To exercise a degree of monetary policy
social policies. independence.
• To raise revenues for the government by keeping
capital in the domestic economy. It facilitates
taxation of wealth and generates interest income.
Practice: Example 7 & 8, Volume 2, • To maintain a low level of interest rates to reduce
Reading19. the government's borrowing costs on its liabilities.

Benefits of Free flow of Financial Capital:

3.5 Capital Restrictions
• Free movement of financial capital allows capital to
be invested efficiently i.e. where it will earn the
Capital restrictions are used to limit or redirect capital highest return.
flows in an economy. Such restrictions include: • Free Capital inflows allow countries to invest in
productive capacity at a rate greater than the
• Taxes or Price controls e.g. special taxes on returns to domestic savings rate.
international investment, taxes on certain types of • Free Capital inflows enable countries to achieve a
transactions, or mandatory reserve requirements*. higher rate of growth.
• Quantity controls e.g. ceilings or special • Longer-term investments by foreign firms provide
authorization requirements for new or existing spillover benefits to local firms (e.g. new technology,
borrowing from foreign creditors. skills, and advanced production and management
• Outright prohibitions on international trade in assets. practices), create a network of local suppliers, and
• Administrative controls e.g. foreign firms need increase efficiency of domestic firms through
approval from government agency regarding increased foreign competition.
transactions for certain types of assets.
Drawbacks of Free flow of Financial Capital:
*Mandatory reserve requirements: Under mandatory
reserve requirements, foreign parties are required to • During macroeconomic crisis, free movement of
deposit some % of the inflow with the central bank for a financial capital may result in capital flight out of the
minimum period at zero interest rate if they want to country.
deposit money in a domestic bank account. • Due to increased foreign competition, domestic
industry may be hurt and are forced to exit the
market.
Reading19 International Trade and Capital Flows FinQuiz.com

Capital restrictions and fixed exchange rate targets: NOTE:

Capital restrictions and fixed exchange rate targets are In order to have effective restrictions on capital inflows,
viewed as complementary instruments because under they should have broad coverage and should be
perfect capital mobility, governments can achieve their implemented forcefully.
domestic and external policy objectives simultaneously
using both capital restrictions and fixed exchange rate Drawbacks of Capital Restrictions:
rather than using only standard monetary and fiscal
policy tools. • Implementing capital restrictions may involve
significant administration costs.
If a government follows tight exchange rate peg system, • Capital restrictions may affect necessary domestic
then capital restrictions help in two ways i.e. policy adjustments.
• Capital restrictions give negative signals regarding
i. They make it easier to maintain the tight exchange the economy, resulting in high costs and difficulty to
rate peg. access foreign funds.
ii. They protect domestic interest rates against • Capital restrictions may lead to decline in trade,
external market forces. Thus, also helps in employment and living standards.
managing the domestic banking and real estate
sectors.
iii. They allow countries to exercise a degree of
monetary policy independence that is difficult to Practice: Example 9,
achieve under a fixed exchange rate regime with Volume 2, Reading19.
free capital flows.

4. THE BALANCE OF PAYMENTS

The balance of payments (BOP) measures the payments Debit entries include:
that flow between any individual country and the rest of
the world. • Purchases of imported goods
• Purchases of imported services e.g. transportation
• It is used to summarize all international economic and travel expenditures
transactions for that country during a specific time • Purchases of foreign financial assets
period, usually a year. • Payments received for exports
• It reflects all payments and liabilities to foreigners • Interest and principal received from debtors
(debits) and all payments and obligations received • Increase in debt owed by foreigners
from foreigners (credits). • Debt payments owed to foreigners
• Income paid on investments of foreigners
Data on trade and capital flows can be used by • Gifts to foreign residents
investors to evaluate an economy’s overall level of • Aid given by home government
capital investment, profitability, and risk. • Overseas investments by home country residents

Credit entries include:

4.1 Balance of Payments Accounts

• Payments for imported goods and services

The BOP is a double-entry system in which every
• Payments for purchased foreign financial assets
transaction involves both a debit and credit. The overall
• Value of exported goods/services
BOP is always in balance (i.e. equal to 0) because each
• Debt payments by foreigners
credit transaction has a balancing debit transaction, • Increase in debt owed to foreigners
and vice versa. • Income received from investments abroad
• Gifts received from foreign residents
Debit: A debit represents • Aid received from foreign governments

• An increase in a country's assets (e.g. purchase of Debit entries include:

foreign assets or the receipt of cash from foreigners).
• A decrease in a country's liabilities (e.g. amount
owed to foreigners). • Purchases of imported goods
• Purchases of imported services e.g. transportation
and travel expenditures
• Purchases of foreign financial assets
• Payments received for exports
• Interest and principal received from debtors
Reading19 International Trade and Capital Flows FinQuiz.com

Credit: A credit represents Financial Account:

It is used to record investment flows. It has two sub-
• A decrease in assets (e.g. sale of goods and services accounts:
to foreigners or the payment of cash to foreigners)
• An increase in liabilities (e.g. amount owed to 1. Financial assets abroad: They include official reserve
foreigners). assets, government assets, and private assets e.g.
gold, foreign currencies, foreign securities, and
Credit entries include: government’s reserve position in the International
Monetary Fund, FDI, and claims reported by resident
• Payments for imported goods and services banks.
• Payments for purchased foreign financial assets 2. Foreign-owned financial assets: They include official
• Payments to creditors assets and other foreign assets i.e. securities issued by
• Income received from investments abroad the reporting country's government and private
• Gifts received from foreign residents sectors (e.g. bonds, equities, and mortgage-backed
• Aid received from foreign governments securities), direct investment, and foreign liabilities
reported by the reporting country's banking sector.
See: Volume 2, Reading19, Exhibit 14.

4.2 Balance of Payment Components Practice: Example 10,

Volume 2, Reading19.

BOP is composed of three components.

Paired Transactions in the BOP Bookkeeping

1) Current account 4.3
System
2) Capital account
3) Financial account
Example:

Current Account (CA): Commercial Exports: Transactions (ia) and (ib)

CA measures the flow of goods and services. It has four A German company sells technology equipment to a
sub-accounts: South Korean auto manufacturer for a total price =
EUR50 million.
1. Merchandise trade includes commodities and
manufactured goods bought, sold, or given away. EUR50 million includes freight charges of EUR 1 million to
2. Services include tourism, transportation, engineering, be paid within 90 days.
and business services i.e. legal services, management
consulting, and accounting, fees from patents and The merchandise will be shipped via a German cargo
copyrights on new technology, software, books, and ship.
movies.
3. Income receipts include income derived from Hence, Germany is exporting two assets i.e.
ownership of assets i.e. dividends & interest payments.
4. Unilateral transfers (i.e. one-way transfers of assets)
1) Equipment
include worker remittances from abroad to their
2) Transportation services (cargo ship service)
home country and foreign direct aid or gifts.

Capital Account: Germany acquires a financial asset i.e. the promise by

the South Korean manufacturer to pay for the
It measures transfers of capital. It has two sub-accounts: equipment in 90 days.

1. Capital transfers include debt forgiveness, transfer of In order to make payments to German company, South
goods and financial assets belonging to migrants as Korean auto manufacturer may purchase Euros from its
they leave or enter the country, transfer of title to local bank (i.e., a EUR demand deposit held by the
fixed assets, transfer of funds linked to the sale or Korean bank in a German bank) and pay them to
acquisition of fixed assets, gift and inheritance taxes, German exporter.
death duties, uninsured damage to fixed assets, and
legacies. Germany would record following:
2. Sales and purchases of non-produced, non-financial
assets i.e. rights to natural resources, and the sale and
purchase of intangible assets i.e. patents, copyrights, • To show an increase in financial asset → EUR 50
trademarks, franchises, and leases. million debit to an account named "'private short-
term claims”.
• To show decrease in assets:
o EUR49 million credit to an account named "good”.
o EUR 1 million credit to an account named
Reading19 International Trade and Capital Flows FinQuiz.com

"service”. Receipts of Income from Foreign Investments:

• German liabilities to South Korean residents (i.e., Transaction (v)
demand deposit held by the Korean bank in a
German bank) would be debited. Residents of Germany can receive interest and
dividends from capital invested in foreign securities and
other financial claims.
Commercial Imports: Transactions (ii)
Similarly, foreign residents can receive interest and
Suppose a German utility company imports gas from
dividends for their investments in Germany.
Russia worth EUR 45 million.
Purchase of Non-financial Assets: Transaction (vi)
Payment is to be made within 90 days.
Suppose, a German utility company purchases the rights
Germany would record:
to exploit a uranium mine from the government of
Kazakhstan and the payment is to be made within 3
• The imported gas as a debit. months.
• The future payment obligation as a credit.
• This transaction involves a non-financial, non-
Loans to Borrowers Abroad: Transactions (iii) produced asset; thus, it is recorded in Germany's
capital account.
A German commercial bank purchases intermediate-
term bonds issued by a Ukrainian steel company worth Source: Volume 2, Reading19, Section 4.3.
EUR 100 million.
See: Volume 2, Reading19, Exhibit 16.
German commercial bank would make payments in
Euros (i.e., by transferring EUR demand deposits).
National Economic Accounts and the Balance
Hence, 4.4
of Payments

• An increase in German holdings of Ukrainian bonds Closed economy: In a closed economy, all output (Y) is
will be recorded as debit. consumed or invested by the private sector (i.e.
• An increase in demand deposits held by Ukrainians domestic households and businesses) or purchased by
in German banks will be recorded as credit. the government.

Purchases of Home country currency by Foreign Central Y=C+I+G

Banks: Transaction (iv)
Open economy: When an economy opens up trade,
Suppose, the Swiss National Bank (SNB) purchased EUR20 some of the domestic output is purchased by foreigners
million i.e. in form of a EUR demand deposit held with a (i.e. exports), whereas some of the domestic spending is
German bank, from local commercial banks in used for purchases of foreign goods and services (i.e.
Switzerland. imports).

Y=C+I+G+(X–M)
• An increase of EUR20 million in German liabilities will
be recorded as debit.
Current Account Balance (X – M): A country has a:
• A decrease in short-term liabilities held by private
foreigners (i.e., Swiss private investors) would be
Current account deficit if imports > exports. It pays for
recorded as credit.
the deficit by

It should be noted that when the SNB purchases EUR

• Borrowing from other countries (↑ in foreign debt e.g.
funds from Swiss commercial banks, it credits them the
direct investments by foreigners), loans by foreign
CHF equivalent of EUR20 million; hence, reflects an
banks, and the sale of domestic equities and fixed-
increase in SNB's liabilities to Swiss commercial banks.
income securities to foreign investors.
• Selling some of its assets.
• These liabilities represent reserve deposits held by
Swiss banks, which can be used for lending purposes
Current account surplus if exports > imports. When a
or creating new deposits.
country has a current account surplus,
• Thus, central banks can affect money supply
through currency interventions (all else equal).
• It lends to other countries or buys more foreign assets
so that other countries can pay their trade deficits
e.g. granting bank loans and investing in financial
and real assets.
Reading19 International Trade and Capital Flows FinQuiz.com

Current Account balance (surplus/deficit) reflects the Sp = I + CA – Sg

size and direction of international borrowing. It also
affects GDP and employment. This reflects that an economy’s private savings can be
used for 3 purposes:
Current Account = X – M= Y – (C+ I + G)
i. To invest in domestic capital (I)
Interpretation of equation: ii. To purchase foreign assets (CA)
iii. To purchase (redeem) government debt (- Sg)
• When a country has CA deficit, → M > X and it
borrows money from foreigners. Current Account Imbalance can be written as:
• When a country has CA surplus, → X > M and it lends
money to foreigners. CA = Sp + Sg – I

We can decompose consumption as follows: Hence, current account deficit (surplus) tends to result
from:
Consumption = Income + transfers – taxes – saving
C=Yd - Sp =Y+R-T-Sp i. Low (high) private savings
ii. High (low) private investment
And, iii. Government deficit (surplus) i.e. Sg< 0 (Sg> 0)
iv. Or a combination of the three
CA = Sp- I+ Government surplus (or government saving)
= Sp- I+ (T- G- R)
Sp + Sg = I + CA
• If trade deficit is due to scarce savings (Sp + Sg), then
where, economy’s capacity to repay its liabilities from future
production remains unchanged.
Sg = government savings • If trade deficit is due to strong investments, then an
This implies that, economy can improve its repaying capacity or
increase its productive assets.
• An open economy can use its saving for: • Current account deficit tends to reflect a strong
o Domestic investment domestic economy, strong domestic credit
o Foreign investment demand, high interest rates and appreciating
• Whereas, a closed economy can use its savings only domestic currency.
for domestic investments. • However, it should be noted that a persistent current
• An open economy can increase investment by account deficit leads to a depreciating currency in
increasing foreign borrowing (i.e. decrease in CA) the long-run.
without increasing domestic savings.

Inter-temporal trade: When an economy has current

Practice: Example 11 & 12,
account deficit, it is effectively importing present
Volume 2, Reading19.
consumption (borrowing to fund current expenditures)
and exporting future consumption (when it repays the
debt).

5. TRADE ORGANIZATIONS

International Monetary Fund (IMF), World Bank (WB), and 4. To promote international monetary cooperation to
World Trade Organization (WTO) are the three deal with international monetary problems.
organizations that set the rules for the international 5. To ensure exchange stability and orderly exchange
trade. arrangements to

5.1 International Monetary Fund • Facilitate growth of international trade.

• Promote high employment.
• Promote sustainable economic growth and poverty
Objectives of IMF:
reduction.
1. To promote exchange rate stability.
2. To help establish multilateral system of payments and 6. To provide temporary financial assistance (i.e. lends
eliminate foreign exchange restrictions. foreign exchange to member countries) to help ease
3. To ensure the stability of the international monetary balance of payments adjustment. These funds are
system. only lent under strict conditions and IMF continually
monitors borrowing countries.
Reading19 International Trade and Capital Flows FinQuiz.com

Sources of funds available to IMF: Member countries Affiliated entities of the World Bank: The World Bank has
provide IMF a pool of gold and currencies that it can use two closely affiliated entities:
for lending purposes.
i. The International Bank for Reconstruction and
The IMF has redefined and deepened its operations by Development (IBRD)
following ways: ii. The International Development Association (IDA)

1. The IMF has improved its lending facilities to better

serve its members. • Both IBRD and IDA are non-profit organizations.
2. The IMF has taken several steps to improve economic
and financial monitoring of global, regional, and Role of IBRD and IDA:
country economies.
To provide low or interest-free loans and grants to
3. The IMF has taken several steps to help global
countries that either have no access to international
economies to resolve global economic imbalances.
credit markets or have unfavorable access to
4. The IMF is devoting more resources to analyze global
international credit markets.
capital market developments and their links with
macroeconomic policy. In addition, it is devoting
IBRD:
resources for the training of country officials to assist
them better manage their financial systems,
monetary and exchange regimes, and capital • The IBRD is market-based entity and one of the most
markets. important supranational borrowers in the
5. IMF assesses financial sector vulnerabilities to alert international capital markets.
countries to vulnerabilities and risks in their financial • IBRD has strong capital position and has very
sectors. conservative financial, liquidity, and lending policies.
Hence, it has high credit rating.
Role of IMF from an investment perspective: The IMF • Because of high credit rating, IBRD can charge low
helps to keep country-specific market risk and global- interest rates to its borrowers (i.e. developing
systemic risk under control. countries).
• IBRD does not obtain funds from outside sources to
fund its own operating costs (i.e. overhead costs).
5.2 World Bank Group • IBRD also finances World Bank operating expenses,
assists IDA and debt relief programs.
Objectives of World Bank:
Sources of funds available to IBRD for lending purposes:
• To provide assistance to developing countries to
reduce poverty and enhance sustainable economic • Funds obtain through selling AAA-rated bonds in the
growth. world's financial markets. However, it earns a small
• To provide funds for development projects (i.e. margin on this lending.
highways, schools). • Income earned from lending out its own capital i.e.
• To provide technical assistance in development reserves built up over the years and money paid in
projects. from its member country shareholders. It represents
• To provide analysis, advice, and information to its the greater proportion of its total income.
member countries for helping them achieve
sustainable economic growth and improve standard
Role of the World Bank from an investment perspective:
of living.
The World Bank helps countries to construct the basic
• To increase the capabilities of its partner countries,
economic infrastructure necessary for domestic financial
people in developing countries, and its own staff.
markets and a well-established financial industry in
developing countries.
Factors necessary for developing countries to grow and
attract business are as follows:
5.3 WORLD TRADE ORGANIZATION
1. Strong governments
2. Educated government officials The International Trade Organization (ITO): It was
3. Effective legal and judicial systems that encourage founded to
business
4. Enforcement of individual and property rights and • Promote international economic cooperation from
contracts perspective of trade.
5. Developed financial systems to support both micro- • Reduce and regulate customs tariffs.
credit financing and larger corporate ventures
financing.
6. Absence of corruption World Trade Organization (WTO): WTO was founded in
1995 and is a successor to General Agreement on Tariffs
and Trade (GATT). It is an international organization that
Reading19 International Trade and Capital Flows FinQuiz.com

• Regulates cross-border trade relationships among Examples of Rounds of Negotiations that took place
countries. under the GATT:
• Serves as the forum for trade negotiations among
countries. • Tokyo round (1970s): To deal with a wide range of
• Monitors a global policy setting to promote coherent non-tariff trade barriers.
and transparent trade policies. • Uruguay round (1986): To deal with agriculture and
• Serves as a major source of economic research and textiles trade issues, intellectual property rights and
analysis. trade in services.

Objectives of WTO: WTO’s goal is to expand trade and Example of Ongoing round of negotiations under WTO:
improve world living standards by establishing trade
policies i.e. • Doha round: Its objective is to enhance globalization
by reducing barriers and subsidies in agriculture and
• Promoting free trade. to deal with a wide range of cross-border services.
• Eliminating barriers to trade (e.g. quotas, duties and
tariffs). Role of the WTO from an investment perspective: The
• Settling trade disputes among countries. WTO provides the major institutional and regulatory base
• Eliminating trade discrimination through most to facilitate establishment of multinational corporations.
favored nation (i.e. treating every country equally). Stocks and bonds of these multinational corporations
• Providing technical cooperation and training to represent the key elements in investment portfolios.
developing, least-developed, and poor countries.
• Cooperating with the other two Briton Woods NOTE:
institutions, the IMF and the World Bank.
The GATT still exists in the form of an updated version of
1994 and it is the WTO's principal treaty for trade in
goods.

Practice: Example 13
Volume 2, Reading19.

Practice: End of Chapter Practice

Problems for Reading19.