2.4.3 International trade

Question 1

Specialisation

Answer 1

people/economies concentrate on goods/services where they have an advantage → can trade these for imports

Question 2

Trade blocs

Answer 2

Groups of countries where barriers to trade are reduced or eliminated between member states, manage and promote trade activities

Question 3

Trade liberalisation

Answer 3

Process of reducing barriers to trade so that economies can move closer to free trade, giving business the chance to develop their products for international markets and expand output

Question 4

Free trade areas

Answer 4

Groups of countries trade freely with eachother, with no trade barriers, but each country retains independent trade policies with the rest of the world

Question 5

Common market

Answer 5

Have free trade internally and a single unified trade policy with the rest of the world → also free movement of labour and capital (investment), EU

Question 6

Harmonisation

Answer 6

All businesses in a trade bloc can compete freely and goods/services can be easily traded

Question 7

Regional trading blocs

Answer 7

a treaty that is signed by two or more countries to encourage the free movement of goods and services across the borders of its members

Question 8

Exports and imports

Answer 8

G/s produced by us and sold to a foreign country/ G/s that we buy from a foreign country

Question 9

Visible and invisible exports

Answer 9

Import that can be touched and handled (cars and apples) / cannot be touched or handled (insurance, banking, tourism)

Question 10

Balance of trade

Answer 10

Difference in value between our visible exports/visible imports

Question 11

describe specialisation in international trade

Answer 11

• concentrating on what you do best
• Economies become more efficient and increase their output
• Works when economies can then trade to access the other goods and services that they do not produce
• In internation trade, economies specialise, produce what they are best at and trade
• Produce what they have competitive advantage in (natural resources, climate, access finance, technology, cheap or skilled labour) → has the lowest opportunity cost
• Output can be increased and then traded for things the country cannot produce to an adequate level
• They can gain competitive advantage over some countries in certain sectors

Question 12

specialisation concerning trade and output

Answer 12

• If all countries specialise in the product with the lowest opp cost and trade, total output increases
• Leads to economic growth and income has increased
• Link between trade and growth is well established, exporting more increased GDP
• Higher GDP leads to higher incomes, leads to more imports and so more trade
• In real world, trade quotas and tariffs can limit the ability to trade freely

Question 13

advantages of specialisation

Answer 13

• Increased efficiency and increased output
• Gains economies of scale
• Goods and services produced more cheaply
• Competitive advantage improved
• Export earnings increase, GDP rises
• Increased competition lowers prices, drives innovation → benefits domestic and foreign consumers

Question 14

disadvantages of specialisation

Answer 14

• Over reliance on one area of the economy, increases risk
• Comparative advantage can move elsewhere (ship building)
• Emerging economies often rely on commodities
• Commodity prices fluctuate greatly
• Natural resources can run out
• Reliance on imports for other goods and services
• Over specialisation: can lead to severe structural unemployment should demand fall or comparative advantage move elsewhere

Question 15

comparative advantage

Answer 15

• Two companies that specialise in the product with the lowest opportunity cost and then trade, real incomes are raised for both countries
• More produced goods and services overall due to specialisation

Question 16

product possibility frontiers

Answer 16

• Limits of production for a countries given resources
• The country can consume at any point on or below the line
• With specialisation and trade, the country can consume at a level previously unreachable (2)

Question 17

benefits of trade blocs for member countries

Answer 17

• Makes it easier to access member’s markets without hindrance
• Encourages specialisation and open up new markets
• Opens up new markets

Trade creation →
- Increases trade between member states due to lower restrictions, leading to economic growth

HOWEVER
- Can lead to trade diversion where trade blocs reduce imports from non member states - level of trade may stay the same, but trade is with different partners → benefits of TB is not as great as first expected

Question 18

how can trade increase economic growth (!!)

Answer 18

• Trade can lead to economic growth if countries specialise in goods and services that they produce most efficiently compared to other countries
• By specialising, economic growth is enhanced, output and income increases
• By trading their surpluses, and exchanging them for products that the economy produces less efficiently → consumer choice and welfare can be increased
• By specialising, global output will increase (economnic growth)
• The link between trade and growth overall is well established → exporting raises GDP
• Higher incomes mean people can afford more imports, which creates new markets for other producers

Question 19

benefits of trading in a TB

Answer 19

• Access to other markets without exports being penalised with tariffs
• Manufacturers can import raw materials without tariffs, so lower costs
• Gain economies of scale
• Spreads risks across more markets
• Greater competition within the block acts as an incentive to increase efficiency
• Lead to trade liberalisation and trade creation between members

Question 20

drawbacks of trading in a TB

Answer 20

• No protection for domestic goods or industries → however, tariffs on imports can encourage consumers to buy domestic goods
• Increased competition for your domestic firms from within the block
• Common external tariffs can increase the cost of raw materials from the rest of the world
• Reaching agreements with other member states can be time consuming so markets less dynamic
• Rules and regulations may not suit all businesses
• Trade diversion away from non members of a bloc may occur, especially if there are preventative measures, distorts comparative advantage

Question 21

why is harmonisation important

Answer 21

• Leads to common regulation, allowing for competition to be fair as all firms follow the same rules
• Businesses can create standardised product to sell in TB markets, lowering costs and enabling firms to gain economies of scale
• Consumers get higher quality products at a lower price

Question 22

trade of balance

Answer 22

• Imports need to be paid for, money leaves the UK economy and goes to the supplier country
• Exports are sold to foreign countries and their payments enter the UK economy
• When the flows of money are added together a balance is created which can be positive or negative
• The balance of trade: revenue generated by sales of visible exports, less the cost of buying visible imports (same for BofT for services)
• Positive balance of trade = trade surplus (exporting more than importing)
• Negative balance of trade = trade deficit (importing more than exporting)

Question 23

impacts of cheap imports on standard of living (balanced argument)

spending vs domestic firms and standard of living

Answer 23

• Importing allows countries to achieve higher standards of living by obtaining goods and services from the most efficient source, creating consumer choices
• Cheaper imports raise standards of living because the consumer has more disposable income left to spend on other things
• Producer can source cheaper raw materials and components from abroad, enable them to cut costs and be more competitive → creates employment, income and wealth
• However: cheap imports can harm DOMESTIC industry as customers substitute cheaper foreign goods for more expensive home products
• Some domestic businesses that cannot compete with imports will exit the market, unemployment rises
  In the LR: standards of living rise, and more jobs are created → gov support may be needed to help adjustments
• Efficient economies: structural change results from increased trade creates new opportunities for businesss and employees (creative destruction)