2 management - School of International Business and ...

Günter S. Heiduk
roeconomic implications. The price on the foreign exchange market will react. A deficit (surplus)
will depreciate (appreciate) the external value of the domestic currency. Or the other way round:
Manipulating the exchange rate (e.g. by keeping it undervalued in a fixed system) may lead to
balance of payments imbalances. From macroeconomic point of view the surplus increases
the foreign assets and the domestic money supply. The latter may cause inflationary pressure.
Imbalances occurring for several years allow drawing conclusions on the competitiveness of the
domestic economy. Measuring the share of the current account in the GDP informs about the
degree of openness. Finally, the balance of payments is an important source of information for
governments as to when, whom, why and how to protect or subsidize.
Last but not least, it has to be pointed out that the balance of payments does not include cross-bor-
der transactions that are not combined with direct monetary flows, (e.g. cooperation agreements
between firms, migration). Figure 10 illustrates how close the theories in international economics
follow the statistical scheme of the balance of payments.
Figure 10 | Cross-border transactions, balance of payments and theories in international economics
Source: Own
3.2 THEORY OF INTERNATIONAL TRADE
3.2.1 A BRIEF HISTORICAL OVERVIEW
A brief historical review shows that trade in the medieval, pre-industrial period was treated as an
instrument to build a wealthy and powerful state. »Adam Smith coined the term ‘mercantile system’
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