Trade Flashcards
Globalisation
increasing integration between the countries of the world
Characteristics of globalisation
- greater trade between countries
- higher levels of labour labour migration between countries
- increase capital transfers between countries through FDI and portfolio investment
Free trade
The importing and exporting of goods and services, unrestricted by protectionist measures, such as tariffs and quoatas
Absolute advantage
Occurs when a country can produce more of a product using the same factors of production
Comparative advantage
when a country produces a good in which they have a lower opportunity cost of production i.e give up fewest units of the other good
Comparative advantage
when a country produces a good in which they have a lower opportunity cost of production i.e give up fewest units of the other good
Limitations of comparative advantage
- factors of production may not be perfectly mobile
- ignores transport costs
- ignores import/export restriction
Benefits of free trade (developed countries)
- productive efficiency (more comp)
- Allocative efficiency (more choice)
- Dynamic efficinecy (more innovation)
Benefits of free trade (developing countries(
- inflows of new knowledge
- rising living standards
- reduction in absolute poverty
Drawbacks of free trade (developed countries)
- government cannot raise money through tariffs
- excessive imports current account deficit
- loss of AD
Drawbacks of free trade (developing countries)
Lack of diversification (mostly production of primary products)
- environmental damage
protectionism
implementing policies to protect an economy through restrictions on imports
Reasons for Protectionism: Infant Industry argument
- Infant industry argument = protecting a young industry which may not be able to survive foreign competition, especially in the face of large start up costs
Reasons for protectionism: job protection
- job protection = stop imports from taking domestic customers and therefore are more profits for domestic businesses who can maintain employment levels
Reasons for protectionism: BoP
reduce imports into a country correct current account
Reasons against Protectionism: infant industry
will the government pick good industry to support
concerns whether a lack of competitive pressure will allow the infant industry to become efficient
Reasons against protectionism: job protection
consumers will have less choice and higher prices
Reasons against protectionism:BoP
other policies to improve BOP eg demand reduction, supply side and exchange rates
Methods of protection
tarrif
import quota
export subisidies
Effects of the Tariff
- domestic supply increased
- domestic price increased
- domestic demand decreased
- imports and import revenue decreased
- gov gain tax revenue
Economics effects of quotas
- domestic supply increased
- domestic price increased
- domestic demand decreased
- imports and import revenue decreased
What is the impact of a tariff if PED is inelastic
if PED/PES is inelastic then tariff wont help domestic firms that much because they may not have spare capacity
Arguments for being outside the EU
1) trade diversion - UK can buy goods from the cheapest supplier tariff free, inside the EU may not be cheapest because of common external tariff
2) businesses will no longer have to comply with EU regulations
3) wages may rise due to reduced labour supply (no free movement of labour)
Arguments for EU membership
1) Access to larger supply of labour, potentially cheaper, well qualified workers from across the EU
2) trade creation - benefits of being able to buy tariff free = expansion of demand and improvement in overall welfare for consumers
3) potential economies of scale from selling to larger population
