4.3.2 Why Trade? Flashcards
What are the different reasons for international trade?
- Different Factor Endowments
- Price
- Product Differentiation
- Political Reasons
How is different factor endowments a reason for trade?
Nations will trade factors that they have more of in exchange for factors that they have less of
Define Factor Endowments
Factor Endowments are the amount of land, labour, capital and enterprise that a country possesses and can exploit for manufacturing
How is price a reason for trade?
Some countries can produce goods cheaper than others (perhaps due to comparative advantage) so people will buy from that country instead of their own
How is product differentiation a reason for trade?
Some people will want to buy products from other countries because of differences in the good produced there from a domestically produced good (E.g. german cars are higher quality than american cars)
How is political reasons a reason for trade?
Countries will sign trade deals with or impose trade embargos on other countries.
What are the main factors affecting patterns of trade?
- The impact of emerging economies like China
- Changes in relative Exchange rates
- Growth of Trading Blocs/Bilateral Trading Agreements
- Comparative and Absolute Advantage
- Abundance of Factors of Production
How does emerging economies like China affect patterns of trade?
As economies grow, they import and export more. Countries like China have become some of the biggest global exporters and have disrupted previous trading patterns due to their comparative advantage in producing certain goods
How do changes in relative exchange rates affect patterns of trade?
Will make buying goods from certain countries cheaper or more expensive, so more or less will be imported/exported from there
How does the growth of trading blocs affect patterns of trade
They increase trade within the bloc/agreement but decrease trade outside the bloc
How does comparative advantage/absolute advantage affect patterns of trade?
Countries with comparative advantage will be able to more cheaply produce goods than a country at a comparative disadvantage so they will export to those countries because it is cheaper
Define Absolute Advantage
The ability of a country, individual, company or region to produce a good or service at a lower cost per unit than anyone else
Define Comparative Advantage
The ability of a country, individual, company or region to produce a good or service at a lower opportunity cost than anyone else
Evaluation point for: the effect of Trading Blocs on patterns of trade
Size of trade diversion depends upon size of tariff for trading with non-members. Also depends on the prices for trading in the bloc, if trading outside is significantly cheaper it may not be affected by the tariff
Evaluate point for: the effect of factor abundance on patterns of trade
Factor abundance is not static it is dynamically changing all the time, so how they affect patterns will constantly change
Evaluate: Changing Exchange Rates effect on patterns of trade
Affected by inflation. High inflation + depreciation means the increase in exports would be mostly cancelled out
What is the ‘Terms of Trade’?
The ratio between price of exports and price of imports.
(Index of Exports Price/Index of Import Price) * 100
What does it mean for the terms of trade to improve?
the ‘Terms of Trade’ value will increase, meaning export prices are comparatively larger
What does it mean for the terms of trade to deteriorate?
The Terms of Trade will decrease, making imports more expensive comparative to exports
How do terms of trade affect whether two countries will trade?
Trade will only take place between two countries if the terms of trade lie within the OC ratios of each country
What are the arguments for protectionism?
- Infant industry argument
- Job Protection argument
- Dumping Argument
- Cheap Labour Argument
- Terms of Trade Argument
Explain the infant industry argument for protectionism
Infant industries have higher costs than foreign competitors so cannot compete without protectionism
Explain the job protection argument for protectionism
Protectionist policy preserves jobs by giving more market share to domestic firms (but higher prices and less choice for consumers)
Explain the dumping argument for protectionism
Protectionism prevents dumping (selling of excess supply from an another country at an excessively low price) which would otherwise lead to domestic producers being forced out of the market or losing profit
Explain the Cheap Labour Argument for protectionism
Countries with high labour costs cannot compete with goods produced by low labour cost countries like China so they need to be protected
Explain the counterargument to the cheap labour argument for protectionism?
Will lead to misallocation of resources as consumers are forced to buy high cost domestic, rather than low cost foreign.
What are the counter arguments to the infant industry argument for protectionism?
-X inefficiency from lack of competition means they cant compete internationally when the trade barriers are lifted.
Disadvantages of protectionism
- Potential Retaliation
- Decline in World Trade outside of blocs
- Inflationary Consequences
- Distortion of comparative advantage
How does protectionism have inflationary consequences?
Tariffs on raw materials leads to cost push inflation. Increased demand for domestic goods as substitute for imports leads to demand pull inflation
What is the effect of a tariff on consumers?
Higher prices and a lack of consumer surplus. Welfare loss due to spending more than necessary on domestic goods that other countries have a comparative advantage in
What is the effect of a tariff on producers?
Higher domestic output
What is the effect of a tariff on tax revenue for governments?
Increased tax revenue from imports.
What is the effect of a tariff on the balance of trade?
Will increase a balance of trade surplus because imports will decrease and exports will stay the same (ceteris paribus, assuming no retaliation)
Evaluation points for the impact of tariffs on an economy
- Depends on trade as percentage of GDP
- Depends on Price Elasticity of Demand for Imports
- Short Term/Long Term for crops
Explain the point about how tariffs impact crops in the short term
Short term supply elasticities are very inelastic for agriculture as it takes atleast a season to respond to price change so tariffs may only decrease imports for major crops slightly
Explain the point about how tariffs impact crops in the long term
Will have a greater effect in decreasing imports in the long run compared to the short run because domestic producers can respond to the price change
Trading Blocs can lead to Trade _____ and Trade _____
Trade Creation and Trade Diversion
What is the marker for whether a trading bloc is successful or not?
It is successful if more trade is created than diverted
What is the aim of the WTO?
To liberalise trade and create a fairer global economy
In what ways have the WTO been successful in achieving their aims?
-Managed substantial reduction in tariffs on manufactured goods
In what ways have the WTO been unsuccessful in acheiving thei aims?
- Has been much less successful in reducing barriers to trade in services comparative to goods
- There has been a growth in non-tariff barriers which offset the gains made by reduction in tariffs by the WTO
How do trading blocs cause trade creation?
Making it easier and cheaper for members to trade
How do trading blocs cause trade diversion?
Making it harder and more expensive to trade outside the bloc, so the trade that would have gone outside the bloc is diverted inside the bloc
How are trading blocs damaging to economic development?
LEDCs try export led growth, but it doesn’t work because of tariffs and trade diversion by developed countries. (Can be offset by formation of bloc by LEDCs like the AEC)
How can Trading Blocs lead to inflation?
Imports from a low cost country within a bloc means low price, which leads to greater consumption so AD increases within the bloc, causing inflation in the bloc
