Links between foreign trade and domestic prices. Common and distinctive features of external and internal prices.
In the first chapter I considered the pricing factors. They are equally related to the formation of both internal and external prices, which can be attributed to the common features of external and internal prices.
However, world prices have a number of additional factors that influence the formation of external prices:
- the phase of the economic cycle in which the world economy resides;
- Inflationary processes occurring in countries, depreciation of national currencies, financial crises, economic situation in a country;
- measures of state regulation of prices in individual countries;
- channels through which trade is carried out;
- transport factor;
- The nature of the trade transaction, terms of delivery and payment.
It is worth adding that, as mentioned earlier, world market prices are based on international values and the costs of the leading exporting countries in the world market.
National prices are based on national values, reflecting the costs of national producers. The volumes of world markets and conditions of their functioning are different.
It is obvious that it is expedient to compare external and internal prices for homogeneous goods. There is a number of regularities manifested in the relationship between the level and dynamics of world and domestic prices for similar goods.
The most important of them are the following:
1) coincidence of internal and external prices is extremely rare;
2) the prevailing variant of price discrepancies is the excess of national prices over world prices;
3) The formation of higher domestic prices than world prices for homogeneous products is characteristic of all countries regardless of their level of development;
4) excess of domestic prices over foreign trade prices is more typical for import prices and to a lesser extent for export prices, i.e. world prices;
5) For individual commodities, whose productive use is essential for the functioning of exporting countries, the opposite is typical - a lower level of domestic prices as compared to world prices.
The most illustrative example is the lower level of domestic oil and petroleum product prices in most of the major oil-producing and exporting countries compared to world prices.
It should be taken into account that world prices have a greater impact on national prices than domestic prices on external prices.
World trade prices influence through imports to increase the supply of goods within the national market and work towards lower domestic prices. Domestic prices, however, affect world prices primarily by the size of the commodity mass traded on the world market, i.e. supply.
The extent of such influence depends on the share of export of a certain commodity of a given country in the global export volume. In addition, exports can reduce supply and increase demand for domestically produced goods, thus contributing to higher domestic prices.
Experience shows that the predominant variant of price differences is the excess of domestic prices over world prices for both exported and imported products.
For some countries and goods a higher level of export price is possible in comparison with the domestic one, as additional incentives for the export of goods are created.
In general, in international practice, the tendency of excess of exported goods is in a smoothed form. Because developed countries, while exporting, try to reduce the barriers between domestic and foreign markets to the maximum extent possible by stimulating the export of products. The excess of import prices over domestic ones potentially occurs only in some cases, such as shortage of goods, state regulation of prices in the importing country, when an embargo is declared.
In other cases, a higher level of import prices is economically unacceptable for any country, as it means that such imports are unprofitable and ineffective.
Thus, it is reasonable to conclude that the coincidence of domestic and world prices is an exception rather than a rule.