Trade

• international trade

  the exchange of goods and services between countries
• international trade advantages

  • gives countries access to resources and goods they wouldn't be able to use
  • countries can export goods in order to import goods they can't produce themselves
  • consumers enjoy a larger variety of goods
  • increased competition - lowers prices and increases product innovation
  • more choice, better quality and cheaper products increase standard of living
  • additional markets (markets abroad) allow firms to exploit economies of scale
  • exposes firms to new ideas/skills
  • allows countries to specialise
• advantages of specialisation

  • costs are reduced - passed on as lower prices
  • worlds resources are used more efficiently and sustainably
  • increase global output -> raises living standards
• disadvantages of international trade

  • involves higher transport costs
  • currency exchanges can result in financial losses
  • other costs such as complying with other countries legal and technical requirements, translating legal documents, performing market research overseas
  • increases globalisation - disadvantages of that as well
• disadvantages of specialisation

  • domestic industries may be forced to shut down because foreign firms are better at producing those g&s
  • overreliance
  • vulnerability to external shocks eg cuts in supply of goods they don't produce themselves
  • if a country decides to specialise in one industry other industries may decline e.g shutdown of mines in UK 1980s as UK focused on financial services - risk of structural unemployment
• absolute advantage

  theory of Adam Smith

  When a country can produce more of a good with the same amount of resources than another country.
• opportunity cost

  • the benefit forgone from the next best alternative
• comparative advantage

  When a country can produce a good at a lower opportunity cost than another country
• assumptions of comparative advantage (unrealistic)

  • no economies or diseconomies of scale
  • no transport costs
  • no barriers to trade
  • perfect knowledge
  • all factors of production are mobile
• comparative advantage on PPF

  • country with gentler gradient has comp adv of good on x axis
  • country with steeper gradient has comp adv of good on y axis
• importance of trade for developed countries

  • imports are crucial to maintaining high standards of living
  • products will be cheaper when bought from abroad (cheaper labour)
• importance of trade for developing countries

  • they can import goods they don't have the technology to produce themselves - results in higher standard of living
  • gives countries access to new materials - new industries can be created because they can produce new goods
  • will improve economies of developing countries
• free trade

  international tarde without restrictions (eg tariffs or quotas)
• the World Trade Organisation (WTO)

  • an international organisation which aims to help trade be as free as possible
  • provides a forum for its member governments to discuss trade agreements an settle disputes, using a set of trade rules
  • has over 150 members (currently 166)
• why governments may want to impose protectionist measure

  • to protect jobs (risk of job losses if domestic firms are outcompeted by foreign firms)
  • to protect infant industries (they will struggle to compete with international firms)
  • to ban certain demerit goods
  • to avoid over dependence
  • to protect against dumping
  • to correct imbalances in BoP
• dumping

  when firms sell goods abroad at a price that's below the production cost to try to force other countries' domestic producers out of business
• tariffs

  • indirect tax levied on imported goods
  • helps domestic manufacturers to compete
  • raises tax revenue of government
• quotas

  • Quantitative limits on the amount of a good that can be imported into a country
• embargoes (bans)

  • usually imposed on demerit goods (firearms)
  • or for political reasons (eg if 2 countries have a disagreement)
  • less about protecting domestic industries - more on enforcing laws or about politics
• What is free trade also known as?

  Open trade
• What are protectionist barriers?

  Barriers like tariffs, quotas, or regulations
• What is absolute advantage?

  Producing more with fewer resources
• What defines comparative advantage?

  Lower opportunity cost in production
• What are the benefits of free trade?

  • Exploits comparative advantage
  • Increases economic efficiency
  • Wider variety of goods and services
  • Economies of scale
  • Higher employment levels
  • More exports lead to growth
• What are the costs of free trade?

  • Dependency on other countries
  • Job losses from unfair competition
  • Risk of dumping
  • Current account deficit
  • Environmental damages
• What is a tariff?

  Tax on imports
• What is a quota?

  Limit on quantity of imports
• What is an embargo?

  Complete ban on certain products
• What are export subsidies?

  Financial incentives for domestic firms
• What is excessive administrative burdens in trade?

  Expensive paperwork for imports
• What is exchange control?

  Restricting foreign currencies for imports
• What are arguments in favor of protectionism?

  • Protect infant industries
  • Support declining industries
  • Prevent unfair trade practices
  • Diversify the economy
  • Raise government tax revenues
  • Improve trade balance
• What are arguments against protectionism?

  • Leads to trade wars
  • Higher consumer prices
  • Increases monopoly power
  • Resource misallocation
  • Job losses for exporters
  • Encourages inefficiency
• What are trading blocs?

  Groups of countries managing trade activities
• What is trade liberalisation?

  Freeing trade from protectionist measures
• What does the WTO permit regarding trading blocs?

  Lower protection against outside countries
• What is trade creation?

  Increase in welfare from free trade area
• What is trade diversion?

  Shifting imports to higher-cost countries
• What is a Free Trade Area (FTA)?

  Zero import tariffs and non-tariff barriers
• What is a Customs Union (CU)?

  Free trade area plus common external tariff