4.1.2-9 Flashcards
International trade
The exchange of goods and services between countries
Imports
Goods and services coming into a country
Exports
Goods and services going out of a country
Free trade
No restrictions on the flow of goods and services between countries
No government intervention
e.g. EU
Absolute advantage
When a country can produce a good or service using fewer resources than another country
Comparative advantage
Where a country can produce a good or service at a lower opportunity cost than another country
Limitations of a comparative advantage
- Assumes all factors of production are mobile and switching production is quick and easy which isn’t always the case
- Assumes opportunity cost ratios remain the same but is constantly changing
- Exchange rates aren’t factored in
- Transport costs aren’t considered
- Protectionist methods aren’t included
Why does specialisation in a country increase output
- Greater understanding of production
- Each economic unit can specialise in what they’re best at
- Efficient with no switched between staff
- Economies of scale
Advantages of specialisation with countries
- Allows for trade
- Improved GDP
- Economies of scale / lower costs
- Greater choice for consumers
- Better quality goods
- Interdependence between countries
Disadvantages of specialisation and trade
- Overreliance
- Structural unemployment
- Threat of external factors e.g. political
- LEDCs may be discouraged
Dumping
Countries with absolute advantages may sell surpluses at very low prices in other countries driving local producers out of the market
Trading blocs
When the governments of a group of countries agree to trade freely together
Factors influencing the pattern of trade
- The exchange rate
- Trading blocs
Terms of trade definition
The ratio of export prices to Import princes (value of currency)
Increase in export prices improves terms of trade
Increase in import prices leads to a deterioration in the terms of trade.
The terms of trade calculation
Index of export prices / Index of import prices
>100 = improvement in terms of trade <100 = worsening terms of trade
Factors influencing a countries terms of trade
- Inflation rates
- Exchange rates
- PED
Impact of a changing terms of trade
Exports fall as export prices increase. This improves the terms of trade but worsens the current account which causes a depreciation in the exchange rate with less demand for exports.
Import prices then increase and terms of trade worsens. Inflationary pressure.
Export prices then become more attractive and the process starts again
Free trade areas
Members of a trade bloc agree to reduce / eliminate trade barriers
Customs unions
Members remove trade barriers with other members and have similar trade barriers to other countries alongside the members
Common markets
Remove trade barriers
Agreement of common economic policies
Free movement of Factors of production
Monetary unions
Custom union and common market features
Protectionism
When a country takes action to protect its own industries by restricting trade with other countries
Reasons for protectionism
- Infant industries can’t compete with MNCs
- Prevent dumping
- Increase domestic employment
- Increase balance of payments
- Reduce negative externalities
Examples of protectionism
- Tariffs
- Quotas
- Subsidies to domestic firms
- Trade embargoes
- Non - tariff barriers e.g. legal forms
The current account
Primary records of the trade of goods and services
Foreign Direct Investment
Long term
(FDI)
Operations located abroad
Portfolio investment
Short-term
Purchase of financial assets (e.g. bonds)
Causes of a deficit
- Economic growth - more imports
- Weak competitiveness
- High exchange rate
- Weak productivity
How to reduce a deficit
- Devaluation
- Deflationary policies (monetary/fiscal policies)
- Direct controls (policies reducing imports e.g. tariffs)
How to devaluate a currency
- Reducing interest rates
- Selling currency reserves
Floating exchange rate
Exchange rate solely determined by supply and demand
Fixed exchange rate
Government tie exchange rates to the price of another currency
Managed exchange rate
Determined by supply and demand but the government may intervene to influence the exchange rate
