6.2 Trade Flashcards
Trade definition
Concept involving the buy and selling of goods and services
Benefits of foreign trade
- access to cheaper goods and services
- greater range of goods and services
- ability to lower average costs through specialisation
Absolute advantage definition
A country has an absolute advantage in the production of a product if it can be produced for a lower cost than in another country
Specialisation definition
When a country concentrates it’s productive efforts in producing one type of good
Comparative advantage definition
A country has a comparative advantage in the production of a product if it can be produced at a lower opportunity cost than in another country
What are the assumptions of the model of comparative advantage?
- each country’s factors of production are fixed and cannot be improved upon
- factors of production are immobile between countries
- there are constant returns to scale (opportunity cost is constant)
- transport costs are small enough not to cancel out the benefits of specialisation and trade
- there are no barriers to trade (no tariffs or quotas)
How much does foreign trade count for of the UKs GDP?
30%
What are the changing patterns of the UK trade with the rest of the world?
- the EU now accounting for the majority of both the UK imports and exports
- gradual decline in the export of manufactured goods from the UK
- growth in services exports
- fasted growth in imports compared with exports
- China and India becoming more significant for UK exports
Protectionism defenition
Implementing policies that will protect an economy through restrictions on imports
Arguments for protectionism (9 reasons)
- protect infant industries
- protect against ‘dumping’
- protect domestic employment
- protect against low cost labour abroad
- protect product standards
- to raise gov. revenue
- improve current account deficit
- to avoid risk of over-specialisation
- protect sunset industries
Dumping definition
Sale of goods on foreign markets for below its cost of production
Infant industries definition
A small developing industry which cannot yet benefit from economies of scale
What are sunset industries and how does protectionism help them?
They are industries that are in long-term decline, protectionism allows them to decline in a more gradual manner = minimising demand shocks to the domestic economy
Tariffs definition
A tax on imported goods and services
How do tariffs work in terms of a protectionist policy?
They increase the price of imported products relative to domestic ones = contraction of demand for imports + increase in demand for domestic products
Was does the box in the middle of the tariff diagram signify?
Tariffs revenue generated
What is the the triangle left of the central box on the tariffs diagram signify?
The deadweight welfare loss of world efficiency
- as domestic producers are less efficient that the world producers
What is the the triangle right of the central box on the tariffs diagram signify?
Deadweight welfare loss of consumer surplus
- as consumers now have to pay a higher price for there goods
Quotas definition
Quantity limit placed on the number of imports coming into a country
What is the domestic quantity supplied after a quota on imports on a quota diagram?
They are still supplying 0-Q1 but now also supplying Q3-Q4 to take up the excess demand
What has the demand contracted to on quota diagram due to the addition of a quota?
Q2-Q4
What is the foreign quantity supplied after a quota on imports on a quota diagram?
It’s gone from Q1-Q2 and now shrunk to Q1-Q3
What is the right had triangle on the quota diagram signify?
Deadweight welfare loss of consumer surplus
What does the bottom triangle of the middle square on a quota diagram signify?
The deadweight loss of efficiency
Export subsidy definition
A subsidy towards domestic supplier in order to reduce their cost of production, lowering their prices and allowing them to compete with world wide suppliers
What does the raise price on a export subsidy diagram signify?
The price isn’t what they sell there products for, they still sell their products at Pw
But it is the effective price the domestic suppliers are getting
How has the domestic supply changed on a export subsidy diagram?
Was 0-Q1 now 0-Q3
How has imports changed on a export subsidy diagram?
Was Q1-Q2 now Q3-Q4
What is the value of the subsidy on a export subsidy diagram?
The difference between the two supply curves = vertical distance x 0-Q3
Issues related to protectionism
- any use of a protectionism policy is likely to lead to a retaliation by the country affected by the policy
- tariffs and quotas = increase price = loss of consumer surplus + loss of consumer choice
- inefficiency occurs = bad allocation of resources
- tariffs may be regressive = impacts the poor, loss of cheap goods for them
Customs union definition
A free trade area between two or more countries with a common external tariff applied to all outside countries
Free trade area definition
Trade without barriers, such as tariffs, between two or more countries
Common market definition
A customs union that has other forms of economic integration, such as free movement of factors of production between members
What are the main characteristics of a Single European Market
- free movement of goods and services
- free movement of workers and capital
- common product standards and regulations
- some fiscal coordination
- a common external tariff on imports into the SEM
Example of some fiscal coordination within the Single European market
- member’s must have sale tax such as VAT of a leash 15%
Arguments for leaving the EU
- there was threat to competitiveness of domestic businesses, especially those with lower wage costs in EU
- there will be trade diversion = new markets opened up + potentially lower prices goods available
- can keep the £9 billion annual finacial contribution to the EU = used elsewhere
- wages may be pushed downwards due to influx of migrants to the country = increase supply
- need to comply with rules and regulations = extra costs for businesses
- decisions taken by the EU may not be in the best interest of the Uk
Background of the UK and the EU
- joined the EU in 1973
- votes to leave in the 2016 referendum
- left EU on January 31st 2020 = transition period set to end on 31st of December 2020
Arguments for remaining an EU member
- lower prices due to price competition within the market
- benefits of being able to buy products tariff free = lower prices
- access for businesses to a larger supply of labour = better factor mobility to fill shortages
- high quality standards = better products for consumers = improved utility
- wider market to sell products as no tariff = increase consumption by EU members = EU makes up 23% of global GDP
- improves development = migration
Trade liberalisation definition
Trade without barriers or reduction in trade barriers
What is the world trade organisation?
International organisation that regulates world trade
- currently has 164 member states
What does the WHO promote or strive for?
- trade should not be non-discriminating
- trade should be as free from barriers and protectionism
- promote fair competition
- trade should be beneficial for developing countries through special provisions
What are the functions of the WHO?
- set and enforce rules on international trade
- resolve trade disputes
- provide a forum for negotiating trade liberalisation
- to help developing countries fully benefit from global trade
Conflicts between regional trade agreement and the WHO
- trading blocs might distort world trade or adversely affect those who do not belong to them
- conflicts between blocs could lead to a rise in protectionism
- a common external tariff contradicts the WHOs principles
- setting up a customs union or free trade agreement could be seen to violate the WHOs principles
