pattern of trade 4.1

Question 1

What is the geographical pattern of trade?

Answer 1

• 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

Question 2

The Gravity Theory of Trade

Answer 2

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

Question 3

Summary of factors behind the Gravity Theory of Trade:

Answer 3

• 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.

Question 4

What is the commodity pattern of trade?

Answer 4

• 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.

Question 5

primary product dependence

Answer 5

Angola: 89% of exports is crude petroleum (oil), 8% is diamonds

Question 6

Terms of Trade (ToT) index =

Answer 6

(price index for exports) / (price index for imports)

Question 7

A rise in the price index for exports of goods and services improves

Answer 7

the terms of trade and this means that a country can buy more imports for any given level of exports.

Question 8

Factors influencing the terms of trade

Answer 8

• 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

Question 9

A fall in the relative prices of imported technology an

Answer 9

This gives a country the chance to import capital goods more cheaply which will then help to increase labour productivity & their long-run competitiveness.

Question 10

A fall in the relative prices of imported technology eval

Answer 10

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

Question 11

A rise in the unit export prices of a country’s exports an

Answer 11

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.

Question 12

A rise in the unit export prices of a country’s exports eval

Answer 12

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

Question 13

Examine how a free trade area might stimulate economic growth in Sub-Saharan Africa

Answer 13

• 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

Question 14

A customs union comprises a group of countries that agree to:

Answer 14

• Abolish tariffs and quotas between member nations
• Adopt a common external tariff on imports from non-members countries
• Preferential import tariff rates

Question 15

Costs and benefits of regional trade agreements

Answer 15

• 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

Question 16

Role of the WTO in trade liberalisation

Answer 16

• conductor
• tribunal
• monitor
• training

Question 17

Conductor role:

Answer 17

Members of the WTO have come up with a set of rules that apply to international trade

Question 18

Tribunal role:

Answer 18

This role involves settling disputes between members

Question 19

Monitor role:

Answer 19

The WTO reviews the trade policies of its members to make sure that WTO rules are being applied fairly and consistently.

Question 20

Training role:

Answer 20

The WTO provides training to government officials in (mostly) developing countries, to help them engage in trade with other WTO members

Question 21

Factors influencing pattern of trade

Answer 21

• comparative advantage
• emerging economies
• trade blocs and agreement
• relative exchange rates

Question 22

The terms of trade measures the

Answer 22

Rate of exchange of one product for another when two countries trade

Question 23

In general influences of terms of trade

Answer 23

Anything which affects price of countries imports and exports

Question 24

Impact of change in terms of trade

Answer 24

• 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

Question 25

Define trade bloc

Answer 25

A regional trading bloc is a group of countries within a geographical region that protect themselves from imports from non members

Question 26

PTA

Answer 26

Preferential trading areas:

Tariffs and other trade barriers reduce on some goods traded between member countries

Question 27

Free trade area

Answer 27

Reduce or eliminate all trade barriers in goods from other members

Question 28

Customs union

Answer 28

Removal of tariff barriers between members and acceptance of a common external tariff against non members

Question 29

Monetary unions

Answer 29

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

Question 30

Advantages of trade blocs

Answer 30

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

Question 31

Disadvantages of trading blocs

Answer 31

• 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

Question 32

Trade creation

Answer 32

When a country moves from buying goods from a high cost to a lower cost country

Question 33

Trade diversion

Answer 33

When country switches from buying from a low cost country to high cost

Question 34

Trade creation is when

Answer 34

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

Question 35

Example of trade diversion

Answer 35

UK switching from buying New Zealand butter which is cheapest, to european butter after sugar