Trade Flashcards
Absoloute advantage
A country has absolute advantage if it can produce a good or service using fewer resources and at a lower cost than another country.
Comparative advantage
This occurs when a country can produce a good or service at a lower opportunity cost than another country
Free trade
This is when nations trade without protectionist barriers such as tariffs, quotas or regulations
Benefits of free trade
- Countries can exploit there comparative advantage.
- Free trade increases economic efficency leading to a more competitive market therefore lowering the cost of production and increasing output
- higher consumption
- increases in economic wellfare
- specialising will allow countries to exploit EOS lowering there average cost
Cons of free trade
- Can result in job losses as countries with lower labour costs have entered the market
-enviromental damage due to the increases in manufacturing
Reasons for changes in pattern of trade between the UK and the rest of the world
-developing countries have gained comparative advantage in the manufacturing industry as they have lower labour costs
- more developing countries are participating in world trade due to the collapse of communisim
- trade blocs
- changes in relative exchange rates
Protectionisim
The act of guarding a country’s industries from foreign competition. Tariffs , quotas , export subsidies , embargoes and red tape
Tarrif
Tariffs are taxes on imports to a country. QD of domestic goods increases whilst QD of imports decreases.
Quota
A quota limits the quantity of a foreign produced good that is sold in the domestic market. Leads to a rise in price of the good for domestic consumers therefore they become worse off
Export subsidies
This is a form og government intervention that encourages goods to be exported rather than sold in the domestic market. Gov may use tax relief , direct payments or provide cheap access to credit.
Embargoes
Complete ban on trade with a paticular country. Usually politically motivated
Excessive administrative burdens (‘red tape’)
This increases the cost of trading therfore disocurages imports. Makes it difficult to trade with countries using red tape and extrmely harmful for developing countries which are unable to acess these markets. Hard to notice therefore favored
Why might a country use protectionist policies
- trade defecit can be reduced
- infant industries may need protecting
- can be used to correct market failure as it can protect society from them
- improve the current account defecit
- gov may want to protect domestic jobs
- protect sunses industries
- anti dumping
Cons of protectionist policies
- can disort the market and lead to a loss of allocative efficency as it prevents industries from competing in a competitive market
- consumers face high prices and less variety
- extra cost on exporters which could lower output and damage the economy
- tarrifs are regressive and most damaging to those on low and fixed incomes
- can lead to government failure
Customs union
Countries within a customs union have established a common trade policy with the rest of the world. e.g they may use a common external tariff
- there is also free trade between memebers
- eu an example
