Trade Flashcards
Absolute Advantage
When one individual/nation is able to produce a greater level of output than another with the same resources.
Comparative Advantage
When one nation is able to produce a product at a lower opportunity cost than another.
What determines whether a country had a comparative advanatge?
The quantity and quality of factor endowments (best suited FoP) that a nation has, eg. an abundance of land / cotton plants in Ghana.
Why is Comparative Advanatge limited ?
Assumes perfect knowledge
Transportation costs can distort comparative advantage
Neglects EoS benefits
Inflation ?
Import controls - ie. Tariffs
Non-Price Competition - eg. Quality of product
Exchange rates
R+D ?
Benefits of Specialisation (5)
Average Costs fall due to EoS
Falling Prices
The world’s resources are utilised in an efficient way
Global output is increased
Living standards are improved
Costs of Specialisation
Domestic firms may be forced to shut down if foreign firms are better at producing goods than them - creative destruction / structural unemployment.
Specialisation can lead to overreliance on one industry, leaving it very susceptible to external shocks, ie. Poor crop yields (Weather), Stock Market Crashes or break downs of international relations.
Benefits of International Trade
Comparative Advantage
Economic Growth
Improved international relations
Reducing Tariffs and promoting international trade increases consumer surplus.
Greater levels of choice / product variation for consumers - allowing them to best meet their needs and wants.
Economies of Scale
Increased Competition
Disadvantages of International trade
Lack of economic diversity
Primary Dependency - Prebisch-Singer Hypothesis
Structural Unemployment
Interdependence / effect of conflict
Growing inequality
Environmental costs
Labour exploitation
Trade Wars
Definintion of protectionism
Protectionist policies aim to ‘protect’ the domestic market by placing restrictions on imported products. Examples of Protectionist policies include - Tariffs, Quotas + Trade/Export Subsidies.
Example of an expenditure switching policy
Advantages of Protectionism
Protect Infant Industries
Diversification -
Tariffs yield tax revenue for the Government.
Protect vulnerable industries from the global market
Protect Jobs, ie. prevent creative destruction / international competition.
Restore an equal balance of payments, reduce imports
Protection from dumping
Disadvantages of Protectionism
Consumers will have to pay higher prices for imports of goods, ie. reduced consumer surplus
High prices lead to lower levels of demand, derived from which, it can be assumed that unemployment may rise.
Reduced demand for UK exports abroad
Inefficient firms - Lack of competition
No exploitation of comparative advantage
Does not get trade creation benefits - FTA
Restricts EoS benefits
What is a tariff ?
A tax imposed on imports, when entering a new market, increasing its cost of production and price for consumers. For example, the USA has a 35% tariff on the import of Chinese tyres.
Impact of a tariff
The imposition of tariffs increases the cost of production, therefore the foreign supply shifts upwards, leading to a subsequent increase in price
Consequently, the domestic demand for foreign goods contracts from Q4 to Q3.
The consumer surplus decreases
The supply of domestic goods increases
The quantity of imports falls
The domestic producer surplus increases
Net Welfare loss
Increased Tax Rev
What are Quotas
Used to divert demand for certain good domestic suppliers by limiting the quantity of imports.
Impact of Quotas
Price increases
Total domestic demand falls
Consumer surplus reduces
Domestic supply increases
Domestic producer surplus
Volume of imported goods fall
Net Welfare Loss
