Trade

• Absolute advantage refers to when a country's output of a product is greater per unit of resource used than any other country.
• Comparative advantage is when a country's opportunity cost of it producing a good is lower than the opportunity cost of other countries.
• Comparative advantage assumes that:

  • Resources are equal
  • There are no trade barriers
  • No transport costs
  • No diminishing returns
  • Products are homogeneous
• Trade is important for developed countries because...

  • Imports are crucial to maintain standards of living
  • Products are cheaper abroad due to increased competition
• Trade is important for developing countries:

  • Imports are important when the technology is not available to produce the goods themselves
  • It gives access to new materials and improves the economy
• A Customs Union refers to a group of countries that agree to eliminate tariffs and other trade barriers on goods and services.
• Import controls include:

  • Quotas: physical limits on quantities of imported goods
  • Tariffs: taxes imposed (import duties)
• The opposite of import duties are export subsidies. This refers to money given to domestic firms to encourage exports and help make goods cheaper in economic markets.
• Arguments for protectionism:

  • Infant industries are given the chance to grow BUT could create room for inefficiencies in the market.
  • Protects against dumping (selling a product below its cost of production when unwanted). BUT dumping is hard to prove.
  • Protect domestic employment BUT not all businesses are worth saving. Workers may be able to move to better workforces.
  • Raises GOVT revenues through tariffs on imports. This is good in developing countries and could lead to spending on infrastructure projects.
• The Heckscher- Ohlin theory explains that the relative amounts of different factors of production can explain the difference in costs of production between countries and therefore which goods to export. For example, Bangladesh has high levels of unskilled labour which leads to a low opportunity costs of producing unskilled labour so they should export more with it.
• Free trade refers to the exchange of goods and services across borders between economic agents.
• Advantages of free trade:

  • Greater economic growth
  • Chance to gain inwards Foreign Direct Investment
  • Better access to raw materials reducing the costs of production
  • Better living standards due to higher exports