Trade Flashcards
What is an absolute advantage ?
A country has an absolute advantage in the production of a good or service if it can produce it using fewer resources and at a lower cost than the other country
What is a comparative advantage ?
Comparative advantage occurs when a country can produce a good or service at a lower opportunity cost than another country. This means they have to give up producing less of another good than another country
What is free trade ?
Free trade is the act of trading without protection barriers e.g. tariffs, quotas or regulations
What are the benefits of free trade ?
- Countries can exploit their comparative advantage, leads to higher output using fewer resources and increases world GDP. This improves living standards
- Free trade increases economic efficiency by establishing a competitive market, this lowers the cost of production and increases output
- More exports leads to higher rates of economic growth
- Specialising means countries can exploit economies of scale and lower their AC
- By freely trading goods, there is a trade creation due to fewer barriers. This means there is more consumption and large increases of economic welfare
What are the negatives of free trade ?
Free trade has resulted in job losses, since countries with lower labour costs enter the market
Free trade can contribute to environmental damage from transportation and manufacturing
What are the reasons for changing in the pattern of trade between the UK and the rest of the world ?
- Due to lower labour costs developing countries have gained an absolute advantage in the production of manufactured goods so the UK has shifted production abroad
- The deindustrialization of the UK means the manufacturing sector has declined. Causing production of manufactured goods to move to China / India
- This has caused the industrialisation of India and China, their share of world trade has increased as their exports have increased
- However due to Chinas aging population their wage competitiveness has fallen due to the creation of the middle class who demand higher wages and consume more
What is the impact of emerging economies on trade ?
- Since the collapse of communism more countries are participating in trade
- Between 1995 and 2005 India’s share of textiles and clothing fell from 35% to 16% causing them to move towards manufacturing engineering goods causing the UK to sell fewer manufactured goods abroad
- Development if emerging economies and cheap labour cause the UK to lose market share
What are tariffs ?
Tariffs are taxes on imports to a country. It could lead to retaliation so exports might decrease. The impact of tariffs is the quantity demanded of domestic goods increases, whilst the quantity demanded of imports decrease
What are quotas ?
A quota limits the quantity of a foreign produced good that is sold in the domestic market. It sets a physical limit on a specific good imported in a set time. It leads to a rise in the price of the good for domestic consumers, so they become worse off
What are export subsidies ?
This is a form of government intervention to encourage goods to be exported rather than sold on the domestic market. The government might use direct payment, tax relief, or provide cheap access to credit
What are embargoes ?
This is a complete ban on trade with a particular country. It is usually politically motivated
What is excessive administrative burden (red tape) ?
Excessive administrative burdens increase the cost of trading, and hence discourage imports. It makes it difficult to trade with countries imposing red tape and is particularly harmful for developing countries which are unable to access the market
- It’s harder to notice this form of protectionism and so is favoured by many countries
What are the causes and consequences of countries adopting protectionism policies ?
- If a country employed several protectionism measures, then trade deficit would reduce. This is because they’ll be importing less due to tariffs and quotas on imports
- Infant industries may need protecting. These are industries which are relatively new and receive support. Protectionism is usually short term until the industry develops
- Protectionism could be used to correct market failure. It can deal with demerit goods
- Governments may employ protectionism measures to improve current account deficit
- Governments may want to protect domestic jobs
- Protectionism may distort the market and lead to allocative inefficiency. It prevents industries from competing in a competitive market. Consumers face higher prices and less variety, by not competing in a competitive market firms lose incentives to innovate and lower costs
- Tariffs are regressive and most damaging to those on low or fixed incomes
- There is a risk of retaliation from other countries, so countries may become hostile
- Protectionism can lead to government failure
What are custom unions and how do they effect trade ?
- Countries in custom unions have established a common trade policy with the rest of the world. E.g. they may use a common external tariff
- Has free trade between members. The EU is an example of a trade Union
- Common markets establish free trade in goods and services, a common external tariff and allows free movement of capital and labour across labour
Other features of a custom unions includes: - Safety measures for imported goods, such as food, are common across all members
- Common custom rules and procedures
- There is a structure for the combined administration of the nations within custom unions
- There is a common trade policy
What are the main characteristics of a single European market (SEM) ?
- Free movement of goods, services, capital and labour between nations
- Administrative provisions, laws and regulators are approximated between member nations. This could mean some laws are better suited to some countries, and not so for others
Competition policy is common across the whole of the EU - There are common external tariffs
