MACRO - international trade

Question 1

what is comparative advantage vs absolute advantage

Answer 1

ABSOLUTE ADVANTAGE = if a country can produce goods/services using fewer resources and at a lower cost than another country

COMPARATIVE ADVANTAGE = occurs when a country can produce a good/service at a lower opportunity cost than another country. they give up producing less of another good than another country using the same resources (productively efficient)

Question 2

what does comparative advantage mean

Answer 2

countries can specialise where they have comparative advantage
this increases economic welfare by an efficient allocation of resources

Question 3

benefits of trade

Answer 3

• free trade = deeper specialisation and benefits from economies of scale (increasing returns)
• free trade = increased market competition/choice and drives up product quality for consumers
• increased market contestability = reduced prices for consumers = higher real incomes
• trade = better use of scarce resources
• countries can exploit comparative advantage = higher output using fewer resources = increased world GDP = improved living standards
• free trade = increases economic efficiency by establishing competitive market = lower cost of production = increases output
• free trading goods = trade creation = more consumption and large economic welfare increases
• more exports = higher GDP
• specialising = economies of scale = lower AC

Question 4

costs of international trade

Answer 4

• volatile global prices = affects export revenues/profits for producers and tax revenues for governments
• risks exports will be affected by geo-political uncertainties/cyclical fluctuations in demand
• opening up to trade/investment = rising structural unemployment due to changing demand/output
• countries specialising in few commodities suffer from natural resource trap = make them poorer than countries less dependent on exporting primary commodities

Question 5

arguments against protectionism

Answer 5

• resource misallocation = loss of economic efficiency
• dangers of retaliation, risks of persistent trade war
• potential for corruption, tariffs higher in less democratic countries
• higher prices for domestic consumers = regressive effect on poorer people
• increased input costs for home producers = damages competitiveness
• barrier to entry = protectionism reduces market contestability = increases monopoly power

Question 6

how does comparative advantage change patterns of trade between UK and rest of the world

Answer 6

• growth in X of manufactured goods from developing countries to developed
• developing countries gained advantage in production of manufactured goods due to low labour costs
• UK deindustrialisation = manufacturing sector has declined so manufacturing shifted to China whilst UK is more service based
• led to industrialisation of India/China. their share of world trade/volume exported increased
• China’s ageing population = wage competitiveness fallen due to more middle class in China who demand higher wages

Question 7

how do emerging economies change patterns of trade between the UK and the world

Answer 7

• collapse of communism = more countries in world trade
• trade more important for developing than developed, 20% of LDC economies vs 8% US
• 1995 to 2005 = India’s share in textiles/clothing fell from 35% to 16%. they produce engineered goods = UK manufacturers selling fewer manufactured goods abroad
• China/India important for African infrastructure, invested in it for exchange of natural resources
• both china and india’s share in agriculture/fuel/mining declined

Question 8

how has growth of trading blocs and bilateral trading agreements changed the patterns of trade for the UK and outside of it

Answer 8

• more blocs = trade between members but diverted from elsewhere. country consumes more imports from low cost producer than high cost = trade creation
• trade diversion = shifting trade to less efficient producer. country may swap from cheap producer outside bloc to expensive inside bloc
• policies of developed countries = limited ability of developing countries to export primary commodities eg, EU Common Agricultural Policy (CAP) = farmers receive subsidies to encourage production/lower costs = increase in farmers domestic income but other non domestic farmers struggle

Question 9

how do changes in relative exchange rates change UK patterns of trade and the world

Answer 9

• China’s trade surplus with US but this has reduced. change from export led growth to growth from domestic consumption. they kept their currency low to make exports cheap
• can be argued reason for UK trade deficit = strength of pound against euro. in 2015, reached record high against euro

Question 10

what is protectionism

Answer 10

act of guarding a countrys industries from foreign competition

Question 11

what is a tariff

Answer 11

tariffs are taxes on imports
they can lead to retaliation so exports may decrease
impact = QD of domestic goods increase whilst QD of imports decreases

Question 12

what is a quota

Answer 12

limits the quantity of a foreign produced good sold on domestic market. sets physical limit on good imported in set amount of time
= rise in price of good for domestic consumers = they become worse off

Question 13

what is an export subsidy

Answer 13

form of gov intervention to encourage goods to be exported rather than sold domestically
government may use direct payments, tax relief or provide cheap access to credit

Question 14

what is an embargo

Answer 14

complete ban on trade with a particular country usually politically motivated

Question 15

what are excessive administration burdens / red tape

Answer 15

excessive administration = increased cost of trading = discourages imports
makes it difficult to trade with countries imposing red tape = harmful for developing countries unable to access markets

Question 16

causes of countries adopting protectionist policies

Answer 16

• used to correct market failure, deal with demerit goods to protect society from them
• improve current account deficit
• protect domestic jobs
• infant industries may need protecting. new industries which receive support. protectionism usually short term until industry develops

Question 17

consequences of countries adopting protectionist policies

Answer 17

• several protectionist measures = reduced trade deficit due to less imports from tariffs and quotas
• can distort market = loss of allocative efficiency = prevents industries competing in competitive market = loss of consumer welfare = high price less choice. no competition = less incentive to decrease costs of production
• imposes extra cost on exporters = lower output / damage economy
• regressive taxes, damaging to low income earners
• risk of retaliation = countries become hostile = government failure

Question 18

main features of a customs union

Answer 18

• Countries in a customs union have established a common trade policy with the rest of the world. For example, they might use a common external tariff.
• It also has free trade between members.
• The European Union is an example of a Customs Union.
• Common markets establish free trade in goods and services, a common external tariff and allow free movement of capital and labour across borders. When the EU was established, it was a Common Market. EU citizens can work in any country in the EU.

Question 19

other features of a customs union

Answer 19

• safety measures for imported goods, food, are common
• There are common customs rules and procedures.
• There is a structure for the combined administration of the nations within the Customs Union.
• There is a common trade policy. This helps to create and guide trading relationships with countries and blocs outside the Customs Union.

Question 20

main characteristics of the single european market (SEM)

Answer 20

• Free movement of goods, services, capital and labour between nations.
• Administrative provisions, laws and regulators are approximated between member nations.
• This could mean some laws are better suited to some countries, and not so much for others.
• Competition policy is common across the whole of the EU.
• There are common external tariffs.

Question 21

role of the world trade organisation (WTO)

Answer 21

• The WTO promotes world trade through reducing trade barriers and policing existing agreements. It also settles trade disputes, by acting as the judge, and organises trade negotiations.
• Every member of the WTO must follow the rules. Those who break the rules face trade sanctions. In addition to trade in goods, the WTO covers the trade in services and intellectual property rights.
• As of 2015, there are 161 member states in the WTO.

Question 22

named roles of the WTO and explanation

Answer 22

Conductor role – Members of the WTO have come up with a set of rules that apply to international trade; the WTO ensures that these rules are followed. The WTO organises ‘rounds’ of negotiations to be able to develop new rules (e.g. in response to the rise of trade in services)
Tribunal role – This role involves settling disputes between members. Member are encouraged to sort out disputes by themselves, but occasionally the WTO needs to convene a panel of experts.
Monitor role – The WTO reviews the trade policies of its members to make sure that WTO rules are being applied fairly and consistently.
Training role - The WTO provides training to government officials in (mostly) developing countries, to help them engage in trade with other WTO members

Question 23

possible conflicts between regional trade agreements and the WTO

Answer 23

• Trading blocs might distort world trade or adversely affect those who do not belong to them. There could be an inefficient allocation of resources as a result of policies such as the EU CAP.
• Conflicts between blocs could lead to a rise in protectionism. A common external tariff contradicts the WTO’s principles, since although there is free trade between members, protectionist barriers are imposed on those who are not members.
• Some countries might argue that the WTO is too powerful, or that it ignores the problems of developing countries. This could be since developed countries do not trade completely freely with developing countries, which limits their ability to grow.
• Setting up a customs union or a free trade area could be seen to violate the WTO’s principle of having all trading partners treated equally. This is especially if a common external tariff is applied. However, they can complement the trading system and the WTO strives to ensure that non-members can trade freely and easily with the members of a trade bloc.

Question 24

free trade areas examples

Answer 24

1. USMCA – United States- Mexico-Canada agreement (replaced NAFTA in 2018)
2. Mercosur – Brazil, Argentina, Uruguay, Paraguay and Venezuela
3. Association of Southeast Asian Nations Free Trade Area – known as ASEAN
4. Common Market of Eastern and Southern Africa includes Zambia, Rwanda, Swaziland, Ethiopia and
   Kenya
5. Trans-Pacific Partnership (TPP) – an agreement negotiated between Australia, Brunei, Chile, Canada,
   Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam (the USA under Trump dropped out)

Question 25

bilateral trading agreement

Answer 25

A bilateral trade is the exchange of goods between two economies / groups of economies promoting trade in goods and services and flows of foreign investment. The two countries will reduce or eliminate import tariffs, import quotas, export restraints, and other non-tariff trade barriers to encourage trade and investment.

Question 26

examples of bilateral agreements

Answer 26

• EU-Japan Economic Partnership Agreement
• ASEAN – China Free Trade Area
• EU-South Korea Free Trade Deal
• China-Australia Free Trade Agreement