pattern of trade 4.1 Flashcards
What is the geographical pattern of trade?
- This is the countries with whom businesses and people trade
- Intra-regional trade is trade between countries in the same region (European Union, Africa, Asia)
- Countries tend to trade most with other nations in closest proximity – this is known as gravity theory
The Gravity Theory of Trade
Despite decades of globalisation, most trade happens between neighbouring countries. Trade flows within regions, such as the European Union, are far greater than trade flows between regions or continents. The UK, for instance, currently exports about 50% more to Ireland than it does to China
Summary of factors behind the Gravity Theory of Trade:
- Businesses trade more in markets that are in close geographical proximity and with a big market size.
- Shared borders help facilitate high levels of trade and labour mobility especially in a single market.
- Shared language and a single currency cut the cost of agreeing trade contracts and market transactions.
- Similar consumer preferences encourage firms to compete on the basis of the strength of product brands.
What is the commodity pattern of trade?
- This is the type of products (i.e. goods and services) that are traded internationally.
- We can see the extent that a country has a dependence on primary v manufactured v service exports.
- Many less economically developed countries rely heavily on primary product exports.
primary product dependence
Angola: 89% of exports is crude petroleum (oil), 8% is diamonds
Terms of Trade (ToT) index =
(price index for exports) / (price index for imports)
A rise in the price index for exports of goods and services improves
the terms of trade and this means that a country can buy more imports for any given level of exports.
Factors influencing the terms of trade
- Global (world) prices for raw materials and components
- exchange rate
- import tariffs and other trade barriers such as quota
- inflation
- changes in demand/supply of imports or exports
- productivity and incomes
A fall in the relative prices of imported technology an
This gives a country the chance to import capital goods more cheaply which will then help to increase labour productivity & their long-run competitiveness.
A fall in the relative prices of imported technology eval
Capital-intensive production e.g. using robotics may not necessarily create many new jobs & extra incomes and actually replace labour as they can work for long periods, don’t need breaks, holiday sick pay
A rise in the unit export prices of a country’s exports an
Rising export prices cause a decrease in revenues from exports. Worsens the balance of payments on current account. It decreases the stock of foreign exchange reserves.
A rise in the unit export prices of a country’s exports eval
Reduction in AD, could change state of economy and confidence
Depends on PED and quality of exports, if inelastic+high quality then exports will rise
Examine how a free trade area might stimulate economic growth in Sub-Saharan Africa
- incentivise specialise + trade = econ growth
- less tariffs = less costs
- prices of g + s fall as higher comp + prod. + EoS
- increase in income consumers = welfare gain
- higher consumption = derived demand for labour + capital investment = higher LRAS
A customs union comprises a group of countries that agree to:
- Abolish tariffs and quotas between member nations
- Adopt a common external tariff on imports from non-members countries
- Preferential import tariff rates
Costs and benefits of regional trade agreements
- trade creation effects
- can be seen as a threat to globalisation
- trade diversion
- competition, could lead to efficiency or could push domestic firms out the market
- access to more producers/suppliers/consumers
Role of the WTO in trade liberalisation
- conductor
- tribunal
- monitor
- training
Conductor role:
Members of the WTO have come up with a set of rules that apply to international trade
Tribunal role:
This role involves settling disputes between members
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
Factors influencing pattern of trade
- comparative advantage
- emerging economies
- trade blocs and agreement
- relative exchange rates
The terms of trade measures the
Rate of exchange of one product for another when two countries trade
In general influences of terms of trade
Anything which affects price of countries imports and exports
Impact of change in terms of trade
- if ped of trade in elastic, a favourable movement in ToT would improve current account, and vice versa
- improved ToT likely = fall in GDP and rise in unemployment, as if export prices have risen, exports fall, and if by fall in import prices, then imports rise
- but if long term decline in ToT suggests a long term decline in living standards as less imports could be bought
Define trade bloc
A regional trading bloc is a group of countries within a geographical region that protect themselves from imports from non members
PTA
Preferential trading areas:
Tariffs and other trade barriers reduce on some goods traded between member countries
Free trade area
Reduce or eliminate all trade barriers in goods from other members
Customs union
Removal of tariff barriers between members and acceptance of a common external tariff against non members
Monetary unions
Two or more countries with a single currency with an exchange rate monitored and controlled by one central bank or several central banks with coordinated monetary policy
Like EU
Advantages of trade blocs
Static benefits from the gains of specialisation and dynamic benefits from increased competition and resource transfer
- free trade = specialisation = higher output due to CA = EOS
- larger customer market
- firms inside bloc are protected from cheaper competitors
- competition within the bloc
Higher output = more work - greater consumer choice
Disadvantages of trading blocs
- distort world trade and reduce benefits of specialisation
- trade diversion means inefficient producers within bloc are protected
- loss of resources as biggest cities within bloc will attract all, and therefore regional inequalities.
- retaliation blocs
- lessen national sovereignty
Trade creation
When a country moves from buying goods from a high cost to a lower cost country
Trade diversion
When country switches from buying from a low cost country to high cost
Trade creation is when
Trade is created by the joining of a trade union, like when consumption of wine shifted from domestic producers to efficient French when uk joined EU
Example of trade diversion
UK switching from buying New Zealand butter which is cheapest, to european butter after sugar
