International Trade Flashcards
International Trade
The flow of goods and services across national borders
Advantages of free trade
1. Increase in competition
- incentivises domestic firms to produce higher qualty goods
2. Increases consumer welfare
- consumers benefit from lower prices and more choice
- more variety of higher quality goods
- improves standard of living
3. Specialisation
- goods can be produced in countries that have an advantage in producing it
- world becomes more productively efficient as less resources wasted and better use of resources
- increases output and decreases the problem of scarcity
4. Increases profit
- domestic firms make more profit as have a larger customer base
5. Tax revenue
- firms are producing and selling more so the government can collect more corporation tax
- labor is derived demand so income tax increases
6. Lower costs of production
- can import cheaper raw materials from abroad
- also import higher quality machinery
7. Capacity Utilisation
- firms will be able to produce on their ppf curve at their max capacity
- no idle factors of production
Disadvantages of free trade
1. Exploitation
- workers exploited by multinational companies
- give them lower wages and bad working conditions
2. Dependancy
- countries can be too dependent on each other as trade
- very dependent on imports and sensitive to changes in demand so more susceptible to exogenous shocks
3. Deploys infant industries
- small firms that have greater potential if nurtured
- don’t benefit from economies of scale so lots of competition with other countries abroad leads to larger firms destroying these firms that could have benefited economy
4. Unintentional consequences
- use of trains and ships increase
- high movement of goods and services increases negative externalities of production such as pollution
5. High levels of imports
- leakage out of the circular flow of income
- net exports decrease if exports don’t rise too, AD decreases
6. Depends on labour market flexibility
- affects how beneficial trade is
- flexible labour market has workers with occupational mobility and can produce a lot of goods
- if another country is better producing a good you specialize in and lack of labour market flexibility, can lead to structural unemployment
Advantages of international trade for developing economies
1. Export Led Growth
- especially important to developing countries as their domestic demand is very low
- output increases, derived demand for labor increases, so more income, so consumption increases
- AD increases and leads to positive multiplier effect
2. Attracts FDI
- create more job opportunities so unemployment decreases
- also bring in sophisticated technology which improves the productive capacity of the economy
- train workers so they have more transferable skills which improves occupational mobility, improving the quality of labour
3. Access to advanced techonology
- countries can now buy advanced technology from developed countries as they don’t have the capacity to produce it themselves
- allows them to move from primary to secondary sector
4. Soverin wealth fund
- firms can invest in other goods and establish a sovereign wealth fund
- money that is put into a fund and used to invest into stocks and shares to generate more money
- increases social Investments to try and diversify their workforce to produce a wider variety of goods and services
Disadvantages of international trade for developing economies
1. Dependant on primary resources
- vulnerable when these resources run cut in the long term
- cause productive capacity to decrease
- to primary resource extraction is damaging to the natural environment
- depleting resources which reduces the quality and quantity of what they’re producing in the long run
2. Cannot compete
- developing countries can’t compete with cheap foreign imports
- and the specializing in cheap primary commodities so value of exports is low
- doesn’t benefit them in the long run as they grow dependent on the primary sector
3. Rise in inequality
- despite economic growth only the high income households benefited
- owners making more profits
- low income workers replaced by capital
4. Exploitation
- mncs come into the country and may exploit workers by paying them very low wages and bad working conditions
- may not train domestic workers
- deplete natural resources quicker
5. Tarrifs
- increases firms cost of production
- cannot import raw materials and capital
Advantages of international trade for developed economies
1. High valued exports
- benefit from selling higher value exports and goods with elastic yed such as luxury goods
- value of imports decreases and value of exports remain high so net exports increase, balance of payments improves
- if exports increase, employment increases, more income so consumption increases, firms have more profits so invest so AD increases
2. increasing immigration
- due to globalization which can remove or fill any skill shortages
- can put a downwards pressure on wages
3. Have access to raw materials
- which is vital for the production process for developed countries as they are not naturally endowed in raw materials
- firms buy materials for the factor market in developing nations for cheaper and easy to produce more expensive manufactured goods
4. There will be an increase in FDI
- creates new jobs for the economy
- more income, more income tax so more government revenue
- economic growth increases as can invest into welfare
- bring in more advanced capital
Disadvantages of international trade for developed economies
1. Dependancy
- can become dependent on other countries for imports
- may lead to imported inflation which is when inflation increases is another country and we are dependent on them and so have to still buy from them
- if raw material prices increase firms still have to buy it and cost production increases which leads to cost push inflation
- can lead to contagion
- when all financial sectors become interconnected so if there is a financial problem in one country this may impact other countries
- developed nations are dependent on imported raw materials as not naturally endowned
2. Loss of comparative advantage
- comparative advantage is when a country specializes in what they are good at which leads to an overall increase in global trade
- problem arises when another country can produce the good they specialize in better and for cheaper
- they are naturally endowed in the production of this good so have lower cost of productions
- can lead to a decline in the industry
- lots of people lose their jobs and don’t have occupational mobility to move to a tertiary sector which leads to long-term unemployment and hysteresis
- structural unemployment
- can lead to a negative multiplier effect
What does the effectiveness of international trade depend upon?
1. Government response
- depends upon if government diversifies the goods and services they produce to prevent dependency
- putting regulation to ensure that contagion doesn’t occur
2. Sustainability
- depends on if exports are environmentally safe and friendly - if they are a emitting a lot of pollution in the production
- to make these exports which damages the land using a lot of natural resources and not renewable energy which makes growth unsustainable
3. Employment
- if sectors declined due to globalization or international trade unemployment may not increase so not detrimental
- as long as the government have power to train their workers
- depends on what government uses their additional revenue from exports in and if they use it on training workers
4. Ability to attract FDI
- if not able to attract fdi may not see the benefits of international trade
- exports won’t increase significantly
5. Impact of incoming equality
- as International in trade increases wealthier individuals more likely to benefit from trade
- low skilled workers might see a loss in their jobs due to labour capital substitution as firms have more profit from exports to buy capital and cheaper to import capital
6. Consumer welfare
- depends upon if the consumer world for increases
- within free trade there are multinational companies which may exploit workers
- mncs can increase prices as they gave more power and charge higher prices
7. Geographical equality
- as trade increases, concentrated in certain regions such as urban areas
- in rural areas trade is limited so less growth, gov stop investing into these areas
