Chapter 4 - Trade, Protectionism And Globalisation Flashcards
Comparative Advantage
One country has a comparative advantage over another in the production of a good if it can produce at a lower opportunity cost
Assumptions of comparative advantage?
Constant returns of scale: an increase in production leads to an exactly proportionate increase in output.
No transport cost or barriers to international trade.
Perfect mobility of all factors of production.
Externalities are ignored.
Absolute advantage?
A country is said to have an absolute advantage in its production if it can produce more of a product than another country.
Terms of trade?
Measures the average price of a country’s exports relative to the average price of its imports.
terms of trade formula?
Index of exports price
—————————— X 100
Index of import price
What makes trade beneficial (terms of trade)?
Terms of trade must lie between the opportunity cost ratios.
Criticisms to comparative advantage?
Free trade not necessarily free trade, rich countries may use their monopsony power to reduce prices
Law of comparative advantage is based on unrealistic assumptions
Heckscher-Ohlin Model?
Goes further on comparative advantage. Suggest countries will specialise in the production and export of goods which use resources that are abundant in supply
Advantages of free trade?
Higher living standards.
Lower prices.
Increased choice.
Economies of scale.
Role of the WTO?
To promote free trade.
To settle disputes between member countries.
Russia joined in 2012. Now 188 countries.
Disadvantages of free trade?
A deficit on the TRADE IN GOODS AND SERVICES BALANCE if a countries goods are uncompetitive.
Danger of dumping.
Increased unemployment in some countries.
Increased risk of disruption if the economy suffers, like in 2008
Unbalanced development: only countries that have a comparative advantage will be developed. Leading to sectoral imbalances.
Global monopolies (TNCs)
What is dumping?
When a goods is sold at less than the cost of among it to a foreign country. Illegal under the rules of the WTO.
Sectoral imbalance?
Refers to the imbalance of the three main sectors of the economy
Why might developing countries suffer from free trade?
Infant industries unable to compete.
Monopsony power of firms in developed countries might force developing countries to lower their prices.
Countries dependent on primary products might experience declining terms of trade
Types of trade barriers?
Tariffs and customs duties - taxes placed on imports.
Quotas - limits on quantity
Subsidies to domestic producers
Administrative legislation -as the WTO and GATT have reduced tariffs other restrictions are used.
What administrative regulations can be implemented?
Health and safety regulations Environmental regulations Labelling of products Bureaucracy All raise import prices and deter importers.
Disadvantages to protectionism?
May cause retaliation.
Inefficiency as domestic firms face less competition.
Distorts comparative advantage meaning specialisation reduced and lower output.
Consumer welfare reduced
Trading bloc?
Groups of counties that agree to reduce or eliminate trade barriers between countries.
Name 5 trading blocs
European Union (EU)
North American Free Trade Agreement (NAFTA)
Common Market of South America (MERCOSUR)
Central American Foreign Market (CAFM)
Association of Southeast Asian Markets (ASEAN)
What are the 4 types of trading blocs?
Free trade area
Custom unions
Common markets
Monetary unions
What is a free trade area?
A trading bloc where trade barriers are removed between member countries but countries can maintain restrictions on non member countries
What is a customs union?
Free trade between member countries combined with a common external tariff on goods outside the customs union.
What are common markets?
Have the same characteristics as customs unions but include another dimension of free movement of factors of production between member countries. Labour tends to be the most obvious and mobile
What are monetary unions?
Customs unions which adopt a common currency
Why has trade increased by three times what it was in the early 90’s?
Growth of global supply chains.
Increased importance in Emerging Economies.
Fragmentation of production processes along vertical trading chains spread across many countries.
Why do can trading blocs be seen as conflicting with the aims of the WTO?
Although they promote free trade, they prevent trade among non member countries.
What is globalisation?
The economic integration between countries.
Why has globalisation occurred?
Increased trade as a proportion of GDP (from 1960 to now trade has increased as a proportion of GDP from 25% to 57%).
Increased FDI, meaning many manufacturing plants move to developing countries.
Increased capital flows between countries.
Increased movement of labour between countries.
Causes of Globalisation?
Decrease in the cost of transport.
Decrease in cost of communication.
Reduction in world trade barriers.
Opening up of China and collapse of communism.
Growth of trading blocs
Increased importance of transnational companies: Increased FDI from TNCs Cheaper production, known as Offshoring.
What are capital flows?
Capital flows refer to all money moving between countries as a consequence of investment flows into and out of countries around the world.
What are hot money flows?
Capital flows going into and out of countries that is following interest rates or expected increases in the exchange rate.
Benefits of globalisation?
Higher living standards. Economies of scale. Lower prices. Increased consumer choice. Increased tax revenues. Reduction of absolute poverty in developing countries- due to increased GDP. Technological transfer new managerial techniques
Costs of globalisation?
Negative externalities resulting from increased production and trade. e.g. environment.
Over-dependance on imports.
Risk of contagion is increased susceptibleness to economic crises)
Increases Inequality.
Exploitation of labour (TNCs)
Exploitation of resources.
Tax avoidance. (Use of transfer pricing)
Why can globalisation lead to increased inequality?
The demand for more skilled workers in developed countries resulting in an increase in the earnings gap between the highest and lowest payed workers.
What is transfer pricing?
Refers to the price that has been declared by one part of a company for products and services it provides to another part of the same company. Enables TNCs to declare profits in the country in which corporation tax is the lowest.
