Chapter 13 Flashcards
Advantages of International Trade
- Specialisation and exploiting CA
- Exploit economies of scale
- Export goods excess goods when supply is greater than demand
- Trade drives growth when exports have high income elasticity of demand
- Political, social, cultural advantages
- Increased competition increases domestic productivity
- Increased competition reduces domestic price
- Increased competition increases product variety and choice
Elasticity and trade gain
- domestic demand and supply less elastic on readable goods
- more elastic on overseas demand and supply
Limits to trade
- Government restrictions
- Transport costs outweighing CA
- Factors of production may move between countries not the product
Why does specialising increase opportunity costs in the long run
Using resources that are less and less suited to the good and sacrificing other goods at an increasing amount
Comparative advantage
Having a lower opportunity cost of producing the good
Absolute advantage
Producing one unit of good using fewer scarce resources than another country
Law of comparative advantage
When the opportunity cost of producing two different goods is different each country can gain from trade if it produces and exports those goods for which it has a lower opportunity cost and importing the rest
How does abundant resources affect CA
Increased CA if producing products that use that resource
4 reasons countries have advantages in some products and not others
- Availability and quality of resources
- Demand in the home market
- Competition between firms
- Existence of related and supporting industries (efficient value chain)
Competitive advantage of nations
Ability of countries to compete in market for exports and with potential importers. Depends on government policy and the factors that indicate comparative advantage
8 methods of restricting trade
- Customs/tariffs on imports
- Quotas on import volumes
- Exchange controls (limits on how much foreign exchange is available to importers
- Import licensing (requiring importers to have licenses)
- Embargoes (bans)
- Admin regulations
- Procurement policies (favouring domestic suppliers for government purchases)
- Dumping (exports sold at prices below MC - as a result of government subsidies)
Strategic trade theory
Protecting certain industries to enable them to compete more effectively with monopolistic rivals abroad
(Increase long-run competition and to exploit CA that they couldn’t have before)
Infant industry
New industry with potential CA but is not developed enough to realise the potential
Optimum tariff
Tariff that reduced imports to where MSC=MSB
4 strategic trade arguments for restricting trade
- Protect infant industries
- Reduce reliance on goods with little dynamic potential
- To prevent dumping and other unfair trade practices
- Prevent the establishment of a foreign-based monopoly
Economic arguments in favour of restricting trade
- Spread risks of exposure to fluctuating markets
- Reduce influence of trade on consumer tastes
- Prevent the importation of harmful goods
- Take account externalities
- Take advantage of market power in world trade
- Protect declining industries
- Improve balance of payments
4 non-economic arguments in favour of restricting trade
- Maintain self-sufficiency in case trade is denied in the future
- Impose trade sanctions on countries with which the country disagrees politically
- Maintain tradition ways of life
- Maintain a diverse society based on a range of industries rather than one based too narrowly on certain industries
8 problems with protection
- Increases price of goods
- Imposing a tariff leading to welfare loss
- Restraining might be a better solution for declining industries
- May lead to world multiplier effects due to reduced exports worldwide
- May lead to retaliation from other countries (reducing trade, higher costs, less choice)
- Protecting them could lead to them remaining inefficient
- Large costs in administering the policies
- Could lead to corruption
5 rules that WTO members have to follow
- Non-discrimination
- Reciprocity (if a nation benefits from a tariff reduction it should reduce its own tariffs)
- Prohibition of quotas
- Fair competition (countries can ask permission to retaliate against any trade barriers erected against it)
- Binding tariffs (a country cannot raise existing tariffs without negotiation with their trading partners)
Balance of payments account
Record of all economic transactions between the residents of a country and the rest of the world for a specific time period.
3 constituent accounts of balance of payments (and a 4th item to ensure account balances)
- Current account
- Capital account
- Financial account
- Net errors and omissions item
Current account of the balance of payments
records a country’s imports and exports of goods and services, plus incomes and transfers of money to and from abroad
Four component parts of the current account
- Trade in goods account - exports(+), imports(-) of physical goods.
- Trade in services account - records income from(+), expenditure on(-) services
- Net income flows - rent/dividends/wages earned abroad by a country’s residents(+) and earned in the country by foreign residents(-)
- Net current transfers of money - international transfers of money by individuals and firms, and government contributions to(+) and receipts(-) from international organisations
What is recorded in the capital account of the balance of payments
- Capital transfers (e.g. transfer of ownership of long-term assets, money brought in by migrants, official debt forgiveness by goverments)
- Acquisition or disposal of non-produced, non-financial assets such as patents, copyrights, trademarks and franchises
Financial account of the balance of payments
flows of money into (+) or out of (-) the country for investment or as bank deposits or other financial institutions
4 component parts of the financial account
- Direct investment - in physical assets
- Portfolio investment - in financial securities
- Other financial flows - loans/short-term bank deposits
- Flows to and from the country’s reserves - of gold and other foreign currency
Exchange rate
Rate at which one country trades with another on the foreign exchange market.
Exchange rate index
Weighted average of the exchange rate of a country against all other currencies expressed as an index (weights are based on the proportion of transactions.)
Arbitrage
Buying an asset in a market with a low price and selling in a market where it has a higher price to make a profit
Floating exchange rate
Occurs when exchange rate is determined purely by supply and demand, with no government or bank interventions
Currency depreciation vs appreciation
Depr: Fall in free market domestic currency exchange rate
Appr: Rise in free market domestic currency exchange rate
6 possible causes of depreciation in currency
- Fall in domestic interest rates (relative to abroad)
- Higher inflation in the domestic currency
- Rise in domestic incomes
- Investment opportunities improving abroad
- Speculation that exchange rate will fall
- Long-term changes in international trading patterns
