benefits and costs of trade

Question 1

what is free trade?

Answer 1

Free trade is the movement of goods and services across borders without barriers to trade
There are no or limited taxes, quotas, subsidies, regulations on the trade of goods or services

Question 2

what are the Economic Benefits of Free Trade

Answer 2

• flow of new ideas
  -economic development
  -economic growth
  -increased efficiency
  -access to reasources
  -international co-operation
  -greater choice
  -lower price

Question 3

benefits of free trade explained

Answer 3

Greater choice: with access to a wider variety of goods/services, the standard of living improves
Lower prices: As the amount of competition increases, firms benefit from economies of scale, causing costs to fall and consumers benefit in the form of lower prices
International cooperation: required for trade helps countries build better relationships, which leads to lower levels of hostilities
Flow of new ideas: innovative ideas and technology can be shared between countries
Access to resources: output can increase and costs of production can fall with increased access to raw materials
Increased efficiency: international competition allows the most efficient firms to emerge and this improves the use of global resources
Economic growth: exports are a key component of the gross domestic product of many countries and an increase in exports can lead to economic growth
Economic development: Increased output leads to lower levels of unemployment, which leads to higher incomes and a higher standard of living

Question 4

what do international trade favour?

Answer 4

International trade countries increases the choice of goods and services
However, this trade may favour more economically developed countries and and exploit less economically developed countries

Question 5

what are the costs of international trade ?

Answer 5

Deficit on the current account
Unemployment
Over-specialisation
Loss of sovereignty
External shocks

Question 6

costs of international trade explained

Answer 6

Deficit on the current account -Some countries will import more than they export, resulting in a deficit on the current account
In developing countries, this situation is usually the result of a lack of global competitiveness and involves importing necessity products

unemployment - Employment in successful industries will increase, and employment in unsuccessful industries will decrease
Structural unemployment is a particular concern. Government supply-side policies make a significant difference to the length and severity of structural unemployment

over specialisation -Developing countries often lack the finance to develop a diversified product base and end up over-specialising in commodity products
This makes the country’s GDP very dependent on commodity prices

loss of sovereignty - With an increase in trade, languages and cultures have blended, impacting on some indigenous languages and cultures
Countries have also lost some sovereignty as they are more easily influenced by dominant trading partners

External shocks-Shocks to other economies have a knock-on effect due to the interdependence that develops with trade

Question 7

what can change uk trading patterns ?

Answer 7

-comparative advantage
-impact on emerging economies
-growth of trading blocs & bilateral trading agreements
-Changes in relative exchange rates

Question 8

what can change uk trading patterns explained

Answer 8

Comparative advantage: As firms seek to profit maximise they increase production due to natural advantages. When it makes financial sense to outsource production because another country does it better/cheaper. Over time, this changes what countries produce & trade

Impact of emerging economies: Emerging world economies like China, Brazil, India & Thailand have obtained a much higher share of the global business which means that other countries are losing out as trading relationships

Growth of trading blocs & bilateral trading agreements: By December of 2016, the World Trade Organisation (WTO) had helped to facilitate more than 420 regional trading blocs & bilateral agreements (between 2 countries)

Changes in relative exchange rates: If a country’s exchange rate appreciates, then its exports are relatively more expensive & its imports become cheaper. This means that changes to the exchange rates influence the patterns of trade over time as goods/services either become cheaper or more expensive in relation to the price of goods/services in other countries