International trade occurs when countries conduct their trading activities across borders (Carbaugh, 2013). World Trade Organization (WTO) acts as the sole trading body that regulates international trade among countries. Certain factors affect international trade negatively by making the operation of trading activities difficult. In particular, recessions affect international trade in several ways. However, both the WTO and the federal government can adopt specific measures to lessen the effect of recessions on global trade, foreign exchange, and the international flow of capital.
Course Work on International Trade
Recession is a period in the business cycle that features a general decline in the level of economic activities. Recessions define a contraction period that causes a slowdown in the gross national product for at least two consecutive quarters. Due to globalization and international trade, recessions easily affect nations that undertake trade in terms of foreign exchange and international flow of capital.
In 2013, Carbaugh reported that recessions also cause a decline in average incomes, unemployment, inequality, and increased government borrowing. Through such negative impacts, the national output of different countries that participate in international trade declines, thus slowing down international trade. The respective affected countries suffer internally in terms of budget deficits and low purchasing power, thereby affecting international trade negatively. Investments and the overall value of products traded internationally fall during great recessions and depressions. The recent global recession that occurred in the years 2008 and 2009 affected international trade negatively (Carbaugh, 2013).
The European Union countries were the worst hit by the recession. They serve as an ideal example of how recessions affect international trade. The financial crisis caused the devaluation of the euro currency, decline in economic output, and unemployment in the Eurozone. Consequently, this situation affected international trade among member countries.
Measures to reduce the Effect
The federal government and the WTO can adopt specific measures to reduce the effect of recessions on foreign exchange, the international flow of capital, and global trade. The federal government has the power to either raise or decrease the interest rates depending on the prevailing economic situation as a way to fight the effects of the recession (Carbaugh, 2013). Specifically, WTO can create exchange rate measures that govern foreign exchange.
It can obtain authorization from the federal government for artificially manipulating currencies to decrease the effect on foreign exchange. International adjustments in terms of price, income, and monetary can work to maintain equilibrium. The adjustments are necessary for reducing the effect of the recession on the international flow of capital. Also, WTO can encourage countries experiencing recessions to trade in government securities while extending credit or cash to different financial institutions. This measure is crucial in lessening the effect of the recession on global trade as individual countries attain financial power to engage in international trade.
International trade involves giving consumers quality and cheap products, which are inaccessible locally while providing intermediate inputs and the market for manufacturers. Given this strategy, the impacts of the recession on international trade are of great significance to the countries that participate in the trade. Recessions affect foreign exchange, the international flow of capital, and global trading systems. However, the federal authority, in collaboration with WTO, can undertake certain measures such as regulating interest rates to lessen the effects. Such effective plans of action fuel the success of international trade in all business cycles.
Carbaugh, J. (2013). International economics. Mason, OH: South-Western Cengage Learning Publishers. Web.