4.2.6.2 International Trade

• In Absolute Advantage, one country is better at one thing, and another country is better at an other
• Comparative is where one country is better at both goods, so it does the one with lowest opportunity cost ratio, and the other country focus on the other
• Sometimes partial specialisation is needed, so there there can be more of one good and no less of another
• This shows absolute advantage

  
• This shows absolute advantage, as the UK is better at both

  
• This shows comparative advantage as the UK is better at C and the US is better at D

  
• This shows comparative advantage because the UK is better at both.

  
• If the UK is better at both, then the UK should specialise in the one which they make most efficient at, the one with the lower opportunity cost ration compared to the US
• Six advantages to Free Trade:

  1. Export revenue and jobs to help reduce extreme poverty
  2. Increase market contestability and reduce prices for consumers
  3. Better access to products
  4. Inflow of human capital across borders
  5. Exploiting economies of scale
  6. Better use of scarce resources
• The 4 areas for the benefit of trade are:

  1. Theory
  2. Real World
  3. Welfare
  4. Efficiency
• Trade could cause structural unemployment as developing countries have lower fixed costs, so factories ae moved there, causing deindustrialisation in the original country
• Cons of Trade: Dumping
• Dumping: Where a country flood the market with their product, causing the global price to fall, meaning fewer firms can survive
• Dumping Example: China cut the global price of steel by 50% in 2015 after flooding the market
• Cons of Trade: pressure on wages, developing countries, have lower wages, therefore lower fixed costs, therefore can sell products at a lower price
• Cons of Trade: Global shocks (eg. Covid, Ukraine - Russia War) cause supply chain problems, meaning consumer prices will rise
• There are four main methods to protect an economy:

  • Tariffs
  • Quotas
  • Subsidies
  • Embargos
• What effect does a tariff have on the domestic producers?

  Allows inefficiency, increase output, increase producer surplus and economic rent for efficient firms
• What is the effect of a tariff on foreign firm?

  Less output
• What is the effect of a tariff on the consumer?

  Less consumer surplus, less demand, price increase
• What is the effect of a tariff on the government?

  Increase revenue
• A tariff has two dead weight loss triangles
• What is the effect of a quota on domestic firm?

  Allows inefficiency, increase output, increase producer surplus
• What is the effect of a quota on foreign firm?

  decrease output
• What is the effect of a quota on the consumer?

  Price increases, less choice, less demands, consumer surplus decreases
• What is the effect of a quota on the government?

  Potential government failure and the Law of unintended consequences
• What is the effect of a subsidy on the domestic firm?

  increase output, increase revenue for efficient firms, allow for inefficiency
• What is the effect of a subsidy on foreign firm?

  Decrease output
• What is the effect of a subsidy on the consumer?

  Same price, same consumer surplus, pay subsidy through tax
• What is the effect of a subsidy on the government?

  They have to collect it, and pay it, has an opportunity cost
• A quota has two dead weight loss triangles
• A subsidy has one dead weight loss triangle
• The World Trade Organisation is based in Geneva, Switzerland and helps promote free trade between countries, established in 1995
• A Free Trade Area only has no international trade barriers
• A Customs Union has no international trade barriers and a common external tariff
• A Single Market has no international trade barriers, common external tariffs and factor and asset mobility
• A Monetary Union has no international trade barriers, common external tariffs, factor and asset mobility and a common currency (Euro).
• An Economic Union has no international trade barriers, common external tariffs, factor and asset mobility, a common currency (Euro) and a common economic policy - (eg. UK)
• Example of Free Trade Area - NAFTA
• The EU created the Social Chapter to protect workers rights so firms would not try to reduce them to stay competitive