4.1 - Pattern of trade

Question 1

What factors influence the pattern of trade between
countries and changes in trade flows between countries:

Answer 1

• comparative advantage
• impact of emerging economies
• growth of trading blocs and bilateral trading
  agreements
• changes in relative exchange rates

Question 2

How does comparative advantage impact patterns of trade between countries and change trade flow between them?

Answer 2

• countries will trade where there is a comparative advantage
• change in comparative advantage will affect the trade pattern
• firms aim to profit maximise so
• if it makes sense to increase production due to natural advantages, firms do.
• if it makes financial sense to outsource production because another country does it better/cheaper, firms do.
• Over time, this changes what countries produce and trade

Question 3

Given an example of how comparative advantage has changed trade patterns

Answer 3

• recent growth in export of manufactured goods from developing countries to developed countries
• because developing countries have gained comparative advantage in manufacturing goods - lower labour costs
• so production has shifted abroad (eg: China/India)
• however this may decline in China due to rise of middle class - demanding higher wages as well as an ageing population making their wage competitiveness fall.

Question 4

What is the impact of emerging economies on trade patterns/ trade flows between countries?

Answer 4

• Countries grow at different rates
• when they grow, they
  are likely to need to import more goods and services than before as well as exporting
  more to pay for this.
• Emerging economies shift the trade pattern by taking up a larger
  proportion of a country’s imports and exports than they had previously.
• Emerging world economies like China, Brazil, India and Thailand have obtained a much higher share of the global business which means that other countries are losing out as trading relationships change

Question 5

How does the growth of trading blocs and bilateral trading
agreements influence the pattern of trade between
countries and changes in trade flows between countries?

Answer 5

• increase the level of trade between certain countries and so influence the pattern of trade because trade
  increases between these countries and decreases between others
• results in trade creation and causes trade diversion
  > eg : Joining the EU
  meant that the UK traded a lot more with European countries than previously, and
  less with countries outside the EU.

Question 6

How do changes in relative exchange rates influence the pattern of trade between
countries/changes in trade flows between countries?

Answer 6

• exchange rate affects relative prices of goods
  between countries.
• Prices are an important factor in determining whether consumers
  buy goods
• so a change in price will affect the pattern of trade.
  > If a country’s exchange rate appreciates, then its exports are relatively more expensive and its imports become cheaper.