Annex 2B


 world market price
 exchange rate
 international transport costs
 domestic prices.

Other factors influencing the levels of import or export prices (e.g. export and import taxes or
trade subsidies) can be easily included in the above formula. Any change in one of the trade
factors means a change in trade conditions and affects the degree of tradability of the goods
in question. Table B2-1 shows the likely impact of the various trade parameters on the
number of commodities and the quantities traded in the two categories of tradables.

A good is not traded, if its domestic price is too high to be exported (at world market price,
exchange rate, international transport costs and the other factors given), but too low to be
imported. (Other reasons for goods being non-tradables are mentioned in Annex B 1 above).

 Table B2-1: Impact of changing trade parameters on categories of tradables

 Parameter change Effects on categories of tradables*)
 Exports Imports
 World market price
 rises +
 falls -__
 Exchange rate
 rises (devaluation) +
 falls (revaluation) ___
 Transport costs
 rise
 fall + +
 Domestic price
 rises +
 falls +
 Export/import taxes/restrictions
 imposed
 released + +
 Trade subsidies on exports/imports + +

 *) + indicates likely increase in numbers and volume, a likely drop (tendency towards
 non tradability)

 3. Exchange Rate and Current Account Balance

 The exchange rate itself is nothing else than a price, too, namely the price of foreign
 currency. Foreign currency is required to pay for imports, and it becomes available through
 exports. If the market for foreign currency were free (in many developing countries this is not
 the case, see below), the exchange rate would be determined by supply and demand factors as
 with any other commodity. If the value of exports equals the value of imports, the current
 account is in balance and the exchange rate remains unchanged (abstracting from other
 factors influencing the overall balance of payment situation and the exchange rate, such as


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