4.1 Trading Flashcards
What is specialisation
This is when a country focuses on the production of one or a narrow range of goods
What is the UK’s top traded goods
Imports - Cars (6.8%) of M
Exports - (9% of M), UK is also known for their pharmaceutical goods and financial services
What is absolute advantage?
This is when an economy is able to produce a good at a lower cost compared to another economy
What is comparative advantage
When a country should produce a good/service when they have a lower opportunity cost compared to another. (comparative advantage > absolute advantage)
How do you calculate comparative advantage
Opportunity cost of good A = total unit of B/total unit of A
One production should be zero and max production towards who ever has the comparative advantage resulting in a double in production
What is the comparative advantage theory?
This is when countries should specialise on goods where they have lower opportunity cost resulting in increasing in world economic welfare
What are the assumptions of the model of the comparative advantage theory
- assumes there are no transport cost
- assumes there is no EOS (unable to lower AC)
- assumes good are homogenous (in reality it is difficult to quantify/compare goods)
- assumes FoP are perfectly mobile (may be trade barriers)
- depends on whether the trade takes place due to terms of trade
What is patterns of trade
Refers to the changing nature of trade between economies e.g UK due to Covid and Brexit (2020)
What happened to UK imports after Brexit
Q4 2021, imports down 18% compared to imports back in 2019, 9% fall in X to EU countries compared to 2019
What are the advantages of specialisation?
- Can achieve EOS
- increased quality of goods
Disadvantages of specialisation
Overdependent of imports from other economies
Susceptible to economic shock
Factors that influence patterns of trade:
- exchange rates
- globalisation
- degree of protectionism
In what perspective do we look at absolute advantage and comparative advantage?
Absolute - we look at monetary terms
comparative - we look at efficiency
What is terms of trade
Terms of trade tells the quantity of exports that need to be sold in order to purchase a quantity of imports
formula for terms of trade
Average index price of X/average index price of M * 100
What is the base year for terms of trade
When it is 100
What is it called when terms of trade increases and decreases
Increases - improvement
Decreases - deteriorate
Which type of economies is terms of trade important for:
Emerging economies as they must export a lot to buy imports that they cannot produce
What is a trading bloc
It a group of countries that have a signed agreement to reduce protectionist barriers between themselves and promote free trade.
What do we look at when there is a change in the terms of trade
We only look at monetary value
Factors that affect terms of trade
Change in E.R
Inflation
Productivity levels
Increasing demand and incomes
What happens to ToT and C.A when prices of X rise and they’re inelastic
Improvement of ToT
Improvement in C.A due to higher value and same level of quantity demanded
What is a free trade agreement?
It is when two or more countries agree to reduce or remove all trade barriers. Members of the agreement have complete sovereignty to put tariffs on imports from other countries outside the trading bloc
e.g NAFTA
What is a custom union
Same characteristics of a FTA, but all members adopt a common set of tariffs on non-EU members
e.g EU, EAEU
What is a Common Market
Same characteristics as a custom union, however F.o.P can move more freely (free movement of labour and capital)
e.g GCC
What is a monetary union?
Same features as a custom union. however all members adopt the same currency, so exchange rates are controlled by the same central bank or several
e.g EMU (european monetary union)
What are the advantages of a trade bloc?
- can achieve EOS from upscaling for wider markets (fall in AC)
- reduce C.o.P from tariffs
- job creation due to free movement of F.o.P
- greater innovation due to increased competition and lower prices, leading to increased consumer welfare and high consumer surplus
- increase trade creation (increased market share)
What are the disadvantages of a trading bloc?
- loss of monetary sovereignty due to having a single central bank
- loss of trade sovereignty due to tariffs and restrictions
- capital flights and brain drain so may cause unemployment
- fall in revenue for governments
- increase job competition
How can trade blocs lead to regional inequality
Due to free movement of FoP in common markets, labour shortages are made when jobs are filled elsewhere leading to regional inequality
How is trade diversion caused by trading blocs
Members are forced to import from other members which costs more than non-members due to adopting standardised tariffs from custom unions
Define trade diversion?
It is the movement from low cost foreign sources to high cost union suppliers in a custom union
What is lost in trade diversion (diagram)
- loss in consumer surplus (right triangle)
- loss in dynamic efficiency due to no comparative advantage (left triangle)
- Loss in trade bloc efficiency (rectangle)
What is gained in trade creation (diagram)
- gain in consumer surplus (right triangle)
- gain in world efficiency (left triangle)
- Loss in revenue from tariffs (rectangle)
Supply from france falls whilst demand for france imports rises due to fall in prices when joining a trade bloc
Define protectionism
Any attempt the government takes to restrict trade in goods and services between countries.
This is done to protect domestic firms
e.g tariffs, quotas and subsidies
Define tariffs
Taxes imposed on imports that consumers pay (leads to increase in government revenue)
(AP) - chinas retaliation against usa resulted in a trade war
Define quotas
Quotas are a limit on the amount of imports allowed in a country (less aggressive than tariffs)
Define subsidies
(k) grants given to businesses in order to lower cost of production and increase supply in order to make them more competitive against foreign businesses that have comparative advantage
What are the impacts of adding a tariff?
fall in consumer surplus, choice and welfare
producer surplus increases
deterioration of terms of trade
increased domestic firm competition due to reduced foreign competition
What are the evaluations of tariffs
- The PED of tariffs may determine if demand contracts significantly
- Retaliation of other countries may harm the exporting industry
- Saves jobs of domestic industry but harms employment in the exporting industry
- fall in disposable income of consumers, leading to lower profits for domestic industries
- lead to increase in poverty and inequality because tariffs is a regressive tax
What are the impacts of quotas?
- fall in consumer surplus and consumer choice
- no change in government revenue
- increase in domestic producer surplus
- reduced competition for domestic firms (more profit)
- increase in supply from domestic firms
What is the evaluation of quotas
- difficult to measure where the right limit of quota should be set
Why would protectionism be necessary for domestic businesses
- to protect infant firms (due to high AC and sunk cost, foreign competition would be harmful)
- protection from import dumping
- protection from unfair competition
What is important dumping
It is the threat of foreign competitors with low prices harming domestic producers
What are some non-tariff forms of protectionism
Embargoes - total ban on imported goods
Import licensing
Campaigns
Why can tariffs be harmful?
Retaliation - harms export industry
Regressive effects - harms low income
