International trade

• What is an absolute advantage?

  When a country can produce a product using fewer factors of production than another nation
• What is the law of comparative advantage?

  A country should specialise in the good or service it can produce with the lowest opportunity cost , and then trade with another country
• How can a comparative advantage be displayed?

  .

  
• Theoretical advantages of free trade?

  1. Increased efficiency and allocation of world resources through comparative advantage
  2. Access to goods not produced domestically
  3. Lower price through: EOS , competition , technological transfers
  4. Greater consumer choice
  5. Economic growth
• Arguments for protectionism?

  1. To protect an infant industry ( short term protectionism )
  2. Protect against ' dumping ' where foreign firms sell excess below cost of production
  3. Protect domestic employment and against ' unfair ' low cost labor abroad
  4. Raise government revenue ( tariff tax )
  5. Possibly to reduce a current account deficit
• How is a tariff expressed on a graph?

  Tariff's shift the World Supply upwards, increasing price . Domestic supply extends while world supply contracts
• Do tariffs have an impacted on consumer and producer surplus?

  Consumer surplus' are reduced due to tariffs while producer surplus is increased
• Disadvantages of tariffs?

  1. Deadweight welfare loss of consumer surplus due to higher prices and less choice , less choice with world supply
  2. Production inefficiencies - increasing the Q supplied domestically is wasteful and inefficient
  3. Possible tariff retaliation which increases inefficiency and consumer burdens
  4. Question elasticity , if D is inelastic the fall in quantity of imports is very small
• What is an import quota? How can it lead to protectionism?

  Limiting the quantity that a good can be imported into a country leaves excess demand beyond the import quota to be fulfilled by domestic producers

  
• Impact of a quota?

  1. Price: Increased
  2. Domestic demand: Decreased
  3. Domestic supply: Increased
• What is a trade subsidy? How can this be protectionism?

  Government subsidies' domestic firms to reduce costs of production which allows them to compete with international firms . Shown as a rightward shift to domestic S in world trade diagram
• What is the function of the WTO?

  1. Resolves trade disputes
  2. enforces rules on international trade
  3. Provides a forum for trade liberalisation
  4. Increased transparency
  5. Ensure developing countries benefit from free trade
• What is the most favoured nation rule of the WTO?

  It is required that member countries treat all members equally

  However trade preferences can be extended to developing nations
• What is international competitiveness?

  The ability for a nation to compete successfully overseas and sustain improvements to living standards and output
• How to prove competitiveness?

  Unit labor costs - This shows labor costs per output . Indicator of productivity and price competitiveness

  Global competitiveness index - Large number of factors taken into account which then results in an index . The UK is highly rated of GCI
• Factors that determine international developments?

  1. Unit labor costs
  2. Labor flexibility
  3. Labor skills
  4. Innovation
  5. Regulation
  6. Infrastructure
• Policies to improve international competitiveness?

  1. Govt spending on infrastructure - increases business efficiency thus improving price competitiveness
  2. Tax incentives - Lowering corporation tax , may use profit to invest becoming more dynamic thus lowering cost of production
  3. Deregulation - costs are reduced which may translate to lower prices
  4. Govt spending on education - Adult retraining to reduce structural unemployment