Effects of Free Trade and Protection Flashcards
What is free trade?
A policy that does not restrict imports or exports
What is trade liberalisation?
Removing protectionist policies to move towards free trade
What are 4 benefits of free trade for a country?
1) Comparative advantage
2) Increased competition
3) Access to resources
4) Better living standards
What is comparative advantage?
An economy’s ability to make a product at a lower opportunity cost than other economies
True or false: Country A can produce cars more efficiently than Country B. This means that Country A has a comparative advantage in cars.
False
True or false: Country A can produce 2 cars per person per hour, whereas Country B can produce 1 car per person per hour. This means that Country A has a comparative advantage in cars.
False
True or false: When Country A produces a car, it gives up the potential to produce 2 robots. When Country B produces a car, it gives up the potential to produce 3 robots. This means that Country A has a comparative advantage in cars.
True
True or false: When Country A produces a car, it gives up the potential to produce 3 robots. When Country B produces a car, it gives up the potential to produce 2 robots. This means that Country A has a comparative advantage in cars.
False
Why is increased competition a benefit of free trade?
Domestic firms need to find ways to be more efficient to compete with imports, so they either:
1) improve efficiency (improving AS and international competitiveness); or
2) shut down and the economy’s resources (e.g. land, labour, investment) is reallocated to industries in which the country has a comparative advantage
Why are better living standards a benefit of free trade?
Individuals can purchase cheaper imports, increasing how much they can purchase and consume
What are 4 costs for a country of increasing free trade?
1) Structural unemployment
2) National defence
3) Infant industries
4) Dumping
Why does free trade cause structural unemployment?
Industries that cannot compete with cheaper imports will shut down, causing people to lose their jobs and have skills that do not match the available jobs
Why is the argument that free trade worsens unemployment disputed?
In the long-run, free trade should increase the economy’s aggregate supply and international competitiveness, leading to higher growth and employment
Why does free trade risk worsening national defence?
Specialisation means that countries will not be ‘self-sufficient’ in producing essential products, such as food, medicine or military equipment
Why is the argument that free trade worsens national security disputed?
With free trade, countries will be able to afford to buy more essential products than if it tried to inefficiently produce them all itself.
Also, with free trade, a country is less at risk of a sudden supply shock leading to shortages of essential products (such as if there was a drought in the country, they can still purchase food from other countries)
What are infant industries?
Newly established industries
Why might free trade prevent infant industries from growing?
New industries are small and have not achieved economies of scale, so have high costs and therefore cannot compete with large, international firms.
Without protection, new industries are unlikely to be able to expand to the point of being able to compete with the global firms that already exists
Why is the argument that governments should protect infant industries disputed?
Governments that protect infant industries initially rarely remove protection when the industries get big enough to compete on their own
What is dumping?
Firms selling their products in a foreign country for a cheaper price than they do in their home country, with the intention of driving producers in that country out of business and then raising prices again
Why is the argument that governments should protect industries to prevent dumping disputed?
It is often hard to tell whether a foreign firm is dumping or whether foreign firm is just more efficient and cheaper than local firms
What are 3 benefits of free trade for the global economy?
1) Specialisation leads to higher overall GWP
2) Economies of scale lead to higher overall GWP
3) Reduced poverty due to increasing exports from emerging economies
What is economic development?
A sustainable increase in the overall standard of living in an economy
What are some indicators of economic development?
Education levels Life expectancy Industrialisation Poverty rates Gini coefficient Greenhouse gas emissions per capita Air pollution Water pollution
What is HDI?
The Human Development Index is a number between 0 to 1, where the higher the number the better the level of economic development
A country’s HDI is based on its levels of…
GDP per capita
Life expectancy
Education levels
If a country’s life expectancy and education levels stayed the same, but its HDI improved, it means that…
The country’s GDP per capita must have improved
Country A and Country B have the same levels of GDP per capita and education, but Country B has a higher HDI. Therefore…
Country B must have higher life expectancy
Country A and Country B have the same levels of GDP per capita and HDI, but Country B has higher education levels. Therefore…
Country B must have lower life expectancy
What are the features of an advanced economy?
High levels of industrialisation and economic development
High incomes
High service sectors
What are the features of an emerging economy?
Rapidly changing from an agricultural to an industrial economy
High growth rates
Growth is often at the expense of worsening environmental sustainability and widening inequality
What are the features of a developing economy?
Low levels of industrialisation and productivity Low incomes and high poverty Specialisation in agriculture Reliance on aid Often have high population growth
What are 2 examples of emerging economies?
China and India
What are 2 examples of developing economies?
Sudan
Afghanistan
What are 3 domestic factors that cause some countries to be less developed than others?
1) Low labour productivity (lack of skills / education)
2) A lack of natural resources (or in some cases, so many natural resources that it leads to corruption)
3) Corruption (reducing the incentive to work hard, innovate or start a firm)
What are 3 global factors that cause some countries to be less developed than others?
1) Agricultural protectionism and the failure of the Doha Round (so developing countries can’t export their products)
2) Regional trading blocs such as the EU exclude developing economies
3) Foreign investment rarely goes into developing economies due to the risk, so firms there cannot fund improvements in productive capacity
What are the benefits of FDI and TNCs on a country?
1) Provides investment and technology (increasing AS)
2) Creates a demonstration effect (showing others in the country how to produce efficiently)
What are the impacts of portfolio investment?
1) Provides funds for domestic firms to use for investment (increasing AS)
2) But it is volatile (foreigners may pull out funding if there is speculation that the economy is risky) which can cause a sudden and deep recession
What are the costs for a country of receiving FDI or hosting TNCs?
1) Often only locates in countries where there are few regulations on labour and the environment, so causes a ‘race to the bottom’
2) Repatriates profits: lots of the profit is returned to foreign owners, rather than locals
How has globalisation affected economic growth in the global economy?
It has caused global growth to increase overall, but growth within countries has been mixed
How has globalisation affected income inequality in the global economy?
It has caused the gap between rich and poor countries to reduce significantly, but has widened inequality within countries
What are some costs of globalisation for environmental sustainability?
1) Increased pollution from trade
2) Created a ‘race to the bottom’ where governments weaken environmental regulations to attract foreign business
What are some benefits of globalisation for environmental sustainability?
1) Increased cooperation on environmental issues (such as the Paris Agreement)
2) Emerging countries can ‘leapfrog’ (jump from very old, polluting technology to very new, clean technology) because of technological developments made in other countries
