MACRO - international trade Flashcards
what is comparative advantage vs absolute advantage
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)
what does comparative advantage mean
countries can specialise where they have comparative advantage
this increases economic welfare by an efficient allocation of resources
benefits of trade
- 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
costs of international trade
- 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
arguments against protectionism
- 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
how does comparative advantage change patterns of trade between UK and rest of the world
- 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
how do emerging economies change patterns of trade between the UK and the world
- 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
how has growth of trading blocs and bilateral trading agreements changed the patterns of trade for the UK and outside of it
- 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
how do changes in relative exchange rates change UK patterns of trade and the world
- 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
what is protectionism
act of guarding a countrys industries from foreign competition
what is a tariff
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
what is a quota
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
what is an export subsidy
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
what is an embargo
complete ban on trade with a particular country usually politically motivated
what are excessive administration burdens / red tape
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