International trade

Question 1

International trade

Answer 1

The exchange of goods and services across ineternational borders.

Question 2

Absolute advantage

Answer 2

This occurs when one country can produce a good with fewer resources and lower costs than another.

Question 3

Comparative advantage

Answer 3

A country has comparative advantage over another in the production of a good if it can produce it at a lower oppurtunity cost. This means thay have to give up less of another good than another country, using the same resources.

Question 4

The law of comparative advantage

Answer 4

This states that trade can benefit all countries if they specialise in the goods in which they have comparative advantage.

Question 5

Theory of comparative advantage - numerical examples

Answer 5

Country A can produce 30 units of wine and 10 units of wheat with their resources, and country B can produce 32 units of wine and 20 units of wheat.

• Country B has absolute advantage in producing both products
• Country A on the other hand should produce whine as they have a low oppurnunity cost of producing wine

Numerical example

Question 6

Evaluate comaparative advantage theory

Answer 6

• Specilaising fully could alos lead to structural unemployment, since workers might not gain the transferable skilles they need in order to change sectors, or they are simply unable to change.
• Comaprative advantage does not consider the exchnage rate when cosidering the cost of rpoduction for both countries, therefore if the price of one good increases it is more worthwhile to produce that good even if a country has comparative advantage in another good.
• Countires can develop an advtantage in the production of a good, such a vietnam in the production of coffee
• Comparative advantage is derived from a simple model with two countries; the
  global trade market is significantly more complex than this.
• It can be argued that comparative advantage is no longer a relevant concept. Countries do
  not only produce a handful of goods and services, like the theory suggests. Rather, a wide
  variety of goods and services are produced, and there is very little specialisation. This is
  helped by the advancement of technology

Question 7

Advantages of free trade

Answer 7

• Comparative advantage
• Reduction in import tariffs leads to net welfare gain
• Economies of scale
• Increased competition and incentives
• Increased exports
• Making use of surplus raw materials

Question 8

Advantages of free trade - Comparative advantage

Answer 8

The theory of comparative advantage and free trade suggests that a country can increase their economic welfare by cutting tariffs.
It allows them to operate beyond their PPF and therefore results in long run growth.

Increased efficiency: Companies choose to specialize their production on goods or services they can make more efficiently and then purchase what they cannot create from trading partners.

Question 9

Advantages of free trade - Trade creation

Answer 9

• Reducing import tariff can lead to a net gain of economic welfare, TRADE CREATION DIAGRAM.

Question 10

Advantages of free trade - Increased competition and incentives

Answer 10

• Increased competition, free trade means domestic monoploies will face more competition from other countries, this increased competition encourages firms to cut costs and be more efficitent.
• If an economy protects its domestic industry by increasing tariffs industries may not have the incentives to cut costs.

Question 11

Advantages of free trade - Rising exports

Answer 11

• Increased exports, as well as benefits for consumers importing goods, firms exporting goods where the UK has a comparative advantahe will also see improvements in economic welfare. Lower tariffs on UK exports will enable a higher quantity of exports boosting UK jobs and economic growth

Question 12

Advantages of free trade - Making use of surplus raw materials

Answer 12

• Make use of surplus raw materials, not a huge benefit of being rich in reservess of oil and other resouces without trade. Japan has very low raw materials and without trade with have low GDP.

Question 13

Advantages of free trade - Economies of scale

Answer 13

Economies of scale, free trade enables countries to specialise in producing certain goods, therefore they can produce a higher output and benefit from lower average costs, this is important for industries particulary with high fixed costs.

Question 14

Trade creation diagram

Answer 14

• The removal of tariffs leads to lower prices for consumers and an increas in consumer surplus of areas 1,2,3,4.
• Imports will increase from Q3-Q2 to Q4-Q1.
• BUT the government will lose tax revenue of area 3.
• Domestic firms proudcing this good will sell less and lose producer surplus equal to 1.
• However, overall there will be a increase in economic welfare of 2+4.

Question 15

Arguments against free trade

Answer 15

• Infant industry argument
• Senile industry argument
• Diversify the economy
• Raise revenue for the government
• Helps balance of payments
• Protection against dumping

Question 16

Arguments against free trade - Infant industry argument

Answer 16

• If developing countries have industries that are relatively new and they would initially struggle against international competition, however if they invested in the industry than in the furture they may be able to gain comparative.
• Infant industries have much higher average costs, do not have economies of scale.
• Protection would allow developing industries to progress and gain experience to enable them to be able to compete in the future.

Question 17

Arguments against free trade - Senile industry argument

Answer 17

• If industries are declining and incufficient they may require signifcant investment to make them efficient again, protection for these industries would act as a incentive for firms to invest.

Question 18

Arguments against free trade - Diversify the economy

Answer 18

• Many developing countries rely on producing primary products in which they currently have comparative advantage.
• Prices can fluctuate due to enviromental/weather factors
• Goods have a low-income elasticity of demand therefore with economic growth demand will only increase a little.

Question 19

Arguments against free trade - Raise revenue for the government

Answer 19

• Tarrifs, tax on imports can be used to raise money for the government, however this is relatively small.

Question 20

Arguments against free trade - Helps BoP

Answer 20

Reducing inports can help the current account as it resticts imports.
EVAL in the long term this is likely to lead to retaliation and also cause lower exports so it might be counter productive

Question 21

Arguments against free trade - Protection against dumping

Answer 21

Dumping occurs when a country has excess stock and so it sells below cost on global markets causing other producers to become unprofitable.
EXAMPLE - The EU sold a lot of its food surplus from the CAP at very low prices on the world market, this cased probelms for world farmers because they saw a big fall in their market price.

Question 22

Tarriffs

Answer 22

Tax on imports DIAGRAM
- The tariff raises the price from Pw to Pw + t, this leads to a decline for imports, imports were Q4-Q1, after the tariff imports fall to Q3-Q2.
- Consumer surplus falls by 1+2+3+4
- Government revenue of area 3
- Domestic suplliers gain an increase in producer surplus of area 1.
- Net welfare lost is 2 and 4.

Question 23

Qouta

Answer 23

• Limit on the amount of imports that can be brought.
• Reduce imports
• Without the qouta the market price is Pw, and the quantity of imports is Q4 to Q1, world exporters make revenue of areas A B C.

Imosing Qoutas
- Fall in imports to just Q3-Q2
- Domestic suppliers gain more revenue, the price rises to p Qouta and domestic suppliers supply more Q1 to Q2, it can CREATE JOBS.
- Consumers pay a higher price and so total quantity falls from Q4 to Q3.
- There is a net welfare loss for society because the increase in producer surplus is outweighed by the decline in consumer surplus.
- World exporters will make less revenue, unless demand is very inelastic.

Question 24

Quotas v Tariffs

Answer 24

Quotas tend to cause a bigger fall in economic welfare because the government don’t gain any tax revenue, that you get with tariffs.

Quotas allow the country to be certain on the number of imports coming in. Tariffs is more unknown because it depends on the elasticity of demand and how consumers and suppliers react to the tariff.

Quotas may be harder to enforce if it is difficult to count the amount of the good coming into the country.

Quotas could be more unfair. Some export firms may do well if they get the quota allowance, but others may lose out. It becomes a political issue on how to distribute the quotas. Firms may also dislike the uncertainty of not knowing how many quotes to gain

Question 25

Subsidies

Answer 25

Government can subsidies fomestic production this gives them a unfair advantage over competitors, this is quite common.

Imports before the subsidy are Q2-Q1 and after the subsidy they move to Q2-Q3.
Subsidy has no impact on price level and domestic consumption, therefore consumer and producer surplus remains the same.

Question 26

Embargoes and administrative barriers

Answer 26

Total ban of a good, may be used to prevent dangerus usbstances entering the country.

• Administrative barriers include making it mre difficult to trade by impose minimum and enviromental standards. Customs checks and documentaion that adds time and costs ont trade.
  Standards, health saftey and enviromental standards, goal to prevent dumping.

Question 27

Exchange rate manipluation

Answer 27

• Manipulation of the currency in order to make exorts internationaly competitive, depreciation lowers the price of exports, therefore exports rise. Imports become more expensive, imports fall.

Question 28

Protectionism impact on consumers

Answer 28

Tariff and Quotas - High price, lower consumer surplus
Subsidies - Lower prices possibly, higher surplus

Question 29

Employment

Answer 29

Employment rises due to protectionism

Question 30

EVAL protectionsim

Answer 30

EFFICIENCY, net welfare loss on all forms of protecionsism as there is lower allocative effcieny when it promotes higher cots domestic producers over lower cost foreign producers.

CONSUMERS pay higher prices

POLITICAL econonmy, Nationalism, consumers are less visible than the winners, workers are seen as more important.

TIT for TAT, biggest argument against protectionsim is that it leads to tit for tat disputes between countries, who impose tariffs in retaliation of each other, which result in no winners.

Tariffs are regressive and are most damaging for those on low and fixed incomes.

Exporters see a fall in demand, causing less output and unemployment in those industries

Question 31

Kaldor-Hicks

Answer 31

Tariffs lead to welfare loss and according to the Kaldor-Hicks compensation principle, if the losers from an effcient outcome can be compensated for their loss that outcome is effcient.

Question 32

Globalisation definition

Answer 32

The process of increased integration and co-operation of different national economies. It involves national economies becoming increasingly inter-related and integrated.

Question 33

Impacts of globalisation

Answer 33

• Greater free trade
• Greater movement of labour
• Increased capital flows
• Growth of TNcs
• Economies of scale

Question 34

Benefits of globalisation - Free trade

Answer 34

• Countries can sepcialise when they have comparative advantage, there are several gains from this.
• Lower prices for consumers
• Greater choice of goods
• Bigger export markets for domestic manafacturers
• economies of scale through being able to specialaise in certain goods
• Greater competition

Question 35

Benefits of globalisation - Movement of labour

Answer 35

• Increased labour migration gives advantages for both workers and teh recipient countries, if countries experience high unemployment there are increased oppurtunities to look for work elsewhere, this process of labour migration also helps reduce geographical inequality.
• Fills labour shoratges, increased economic growth for recipients.

EVAL this issue is also quite controversial. Some are concerned that the free movement of labour can cause excess pressure on housing and social services in some countries.

Question 36

Benefits of globalisation - Economies of scale

Answer 36

Production is increasingly specialised. Globalisation enables goods to be produced in different parts of the world. This greater specialisation enables lower average costs and lower prices for consumers.

Question 37

Benefits of globalisation - Greater competition

Answer 37

Domestic monoploies used to be protected by lack of competition, now they face greater competition from foreign firms, forced to lower prices and be more effcient, reduces x-ineeficieny.

Question 38

Benefits of globalisation - Increased investment

Answer 38

Globalisation has enebaled increased levels of invesment, it has made it easier for countries to attrack investement such as FDI from TNCs.

Question 39

Costs of globalisation

Answer 39

• Free trade is harmful
• Enviromental costs
• Brain drain
• Less cultrual diveristy

Question 40

Costs of globalisation - Free trade is harmful

Answer 40

Developing countries often struggle to compete with developed countries, free trade helps developed countries more.
Infant industries.

Question 41

Costs of globalisation - Enviromental costs

Answer 41

• Increasing use of non renewables
• Increased pollution and global warming
• Firms can also outsource porduction where enviromental standards are much less strict.

HOWEVER
This issue isnt so much a issue of globalisation by a failure to set satisfactory enviromental standards.

Question 42

Costs of globalisation - Labour drain

Answer 42

Globalisation enables workers to move more freely, therefore some countries find it diffulct to hold onto their best skilled workers, who are attracted by higher wages elsewhere.

Question 43

Costs of globalisation - Less cultural diversity

Answer 43

Globalisation has led to increased economic and cultural hegemony. With globalisation there is arguably less cultural diversity; however, it is also led to more options for some people.