2.6.2 Trade Flashcards
benefits of foreign trade
- access to cheaper goods and services
- greater range of “ “
- ability to reduce average costs through specialisation incresed comp
absolute advantage
a country has absolute advantage in the productio of a product if it can be produced for a lower cost than in another country.
comparative advantage
a country has comparative advantage in the production of a product ifit can be produced at a lower opportunity cost than in another.
assumptions of the model of comparative advantage
- factors of production are immobile between countries
- perfect factor mobility exists within each country
- there are constant returns to scale - opportunity cost = constant.
- transport costs small enough not to cancel out benefits of specialisation and trade.
- no barriers to trade e.g. tarrifs, quotas
protectionist polcies:
- quotas
- tarrifs
- export subsidies
- ‘red tape’
protectionist polcies explained
tarrifs
placing tax on omports increases their price relative to domestic output - should lead to contradiction of D and encourage a switch to domestic substitutes
protectionist polcies explained
quotas
restriction on the quantity of an import into the country
protectionist polcies explained
export subsidies
a gov provides subsidies for firms that produce exports
protectionist polcies explained
‘red tape’
= administrative barriers
placing regulations and other admin barriers make it harder for imports to enter the country. e.g. excessive checks at borders
arguements for protectionist polcies
- protection of jobs
- infant industry arguement
- anti-dumping
- sunset industries
- strategic reasons
- customs unions
- the Single European Market
arguements for protectionist polcies
protection of jobs
- jobs may be lost to lower-cost producers overseas
- protection = protects domestic jobs
arguements for protectionist polcies
infant industry arguments
- smaller new established industries dont benefit from econs of scale
- protect them until they have growth and can compete
arguements for protectionist polcies
anti-dumping
DUMPING = low cost producers dump large quantites of production to another countries market below cost price - leads to closure of firms
prevent harm to domestic businesses when faced with dumping by overseas low-cost producers
- seen as sunfair comp but hard to prove
arguements for protectionist polcies
sunset industries
industries in LT decline may benefit from protection to allow them to decline more gradually rather than sudden manner - minimising shocks to domestic econ
arguements for protectionist polcies
custom unions
- involve economic intergration and co-operation between 2 or more countries than are more closely intergrated than a free-trade area.
- major econ benefit = potential gain from free trade, allowing comsumers to access wider choice of goods and services at lowest possible price
arguements for protectionist polcies
single european market
features
* free movements of goods and services
* free moveent of workers and capital
* common product standards and regualtions
* some fiscal or-ordination
* common external tarrif on imports into EU
arguments for being outside EU
- trade diversion
- reduced threat to UK businesses from low cost producers withi the EU
- decisions may not be in interest of UK
- all members have to make financial contributions
- dont have to comply w/ EU regulations
- wages may rise due to reduced labour supply
arguments for EU membership
- access to larger labour supply
- larger markest for business to sell in w no barrier
- trade creation
- potential economies of scale
- wider choice of goods for consumers
- free trade deals outside the EU may not be easy to achieve
WTO
- over 150 members
- promotes trade liberalisation = tade without barriers
- organises talks as a process of trade barrier reduction
- attempts to mediate and settle disputes between members
costs of trade (4)
- The uncontrolled application of comparative advantage may mean that producers and countries over-specialise and become dependent on a few exports + over-reliant on imports.
- Specialising in producing a narrow range of goods and services for the export market can increase the risk of structural unemployment as global demand and trade patterns change.
- Production costs may rise as local producers are affected by diseconomies of scale.
- Prices of goods and services are likely to fall as a result of increased competition, which increases consumer surplus and economic welfare.
