3.1 Trade Flashcards
What are the advantages of free trade?
- Lower prices for consumers: due to free trade consumers can import the goods they want from the country that can make them the cheapest. They do not necessarily have to buy the good domestically.
- Greater choice for consumers: consumers can choose from goods that are made all over the world, and not just in their own country.
- The ability for producers to benefit of economies of scale: producers can sell to a larger market (the whole world instead of just one country) which allows them to
grow and to further exploit economies of scale to produce more efficiently.
-The ability to acquire needed resources: firms may now have access to resources which cannot be found domestically.
- A more efficient allocation of resources: resources can now be used in the country that can make most efficient use of them. Increased competition: free trade opens up the world market to a large number of firms
that will compete. Competition will lead to more diverse products, more quality and lower price. - Source of foreign exchange: countries can use free trade to get foreign currency or make dispose of domestic currency (foreign countries can pay for goods they import in their own currency).
Absolute advantage
A country has absolute advantage in the production of a good when it can produce it using fewer resources than another country.
Comparative advantage
A country has comparative advantage in the production of a good when it can produce it at lower opportunity cost than another country
What are the limitations of the theory of comparative advantage?
- Perfect knowledge is assumed, but it is impossible that everyone knows everything.
- It is assumed that there are no transport costs, while in reality this is not the case.
- It is assumed that there are only two economies producing two goods, while in reality there are a lot of economies producing a lot of goods.
- It is assumed that costs of production do not change and that the returns to scale are constant, while in reality this won’t be the case.
- It is assumed that the goods that are being traded are completely identical, while in reality differentiation within goods is possible.
- It is assumed that factors of production remain in the country, while in reality factors of production can travel between countries.
- It is assumed that there is perfect free trade among countries, while in reality trade barriers exist.
World trade organization
The World Trade Organization (WTO) is an international organization that sets the rules for global trading and resolves disputes between its member countries.
what is the objective of the world trade organization (WTO)
Increase international trade by lowering trade barriers and provide a forum for negotiations.
What are the functions of the WTO?
- Administer WTO trade agreements that the WTO has set up between countries.
- Be a forum for trade negotiations and facilitate in setting up trade deals.
- Handle trade disputes among member states.
- Monitor national trade policies.
- Provide technical assistance and training for developing countries.
- Cooperate with other international organizations in order to increase trade.
Tariff
tax charged on imported goods.
Subsidy
sum of money given to producers.
Quota
limit on imported goods.
What are the arguments for protectionism?
- Domestic jobs are protected because domestic consumers are more dependent on domestic production.
- Protection can reduce dependence on international trade and can this way protect national security.
- Infant industries can freely develop when they do not face competition from foreign established producers.
- Maintenance of health, safety and environmental standards.
• Foreign producers can use the market of other countries to dump excess production at extremely low prices. Protectionism protects domestic producers
for this kind of unfair competition.
- Protectionism limits imports, this way a balance of payments deficit can be overcome.
- The government can profit out of tariff revenues.
What are the arguments against protectionism?
- It raises prices because its limits free trade.
- Import is limited, which limits the diversity of goods being supplied on the domestic market, limiting consumer choice.
- Competition diminishes, which reduces the positive effects of competition such as improved quality and diversification of products.
- Foreign countries may retaliate with trade barriers of their own, harming the exporting companies of the domestic country (trade wars).
- Resources may not be used in the country that can make most efficient use of them: misallocation of resources
- Because governments can earn major sums of money by using tariffs there is great potential for corruption, especially in less developed countries.
- Domestic companies may focus more on the domestic market due to the barriers, thereby reducing their export competitiveness.
- Increased cost of imported factors of production, because tariffs and quota may also apply to these.
Preferential trade
agreements
Agreements that give preferential access to certain
products from certain countries by reducing or
eliminating tariffs or by other agreements related to
trade. These agreements can be:
Bilateral: between two countries
Multilateral: between three or more countries
Free trade areas
Countries are able to trade freely among themselves,
but are able to trade with countries outside the free
trade area in anyway they like.
Customs union
Countries are able to trade freely among themselves
and also agree to adopt common external barriers
against any country outside the union.
