Trade Flashcards
Specialisation
Nations tend to specialise in the production of goods in which they are relatively low cost producers due to economies of scale, an abundance of relevant resources, skills, public policies. This allows for mutual gains between trading countries.
Those without an absolute advantage in anything will specialise in goods they are least bad at and consume others through trade while those with an absolute advantage in everything will specialise in the goods they are comparatively best while importing the rest. Thus, all countries can benefit from specialisation and trade
All producers can benefit by specialising and trading goods even when this means that one producer specialises in a good that another can produce at a lower cost. This is done by distinguishing between producers’ comparative advantage.
International trade
Economies of scale and agglomeration in each country as well as differences in the supply of FOPs, technologies available result in between-country differences in the relative costs of particular goods and services.
Countries then specialise in the production of goods and services in which they have a comparative advantage in and engage in trade to acquire goods they do not produce by exchanging with other locations specialising in other goods.
Problem with specialisation?
Since people won’t specialise unless they can acquire the other goods they need, countries must trade to distribute goods and services from the producer to the final user. This may benefit some groups at the expense of others (those in import-competing industries).
Ex) In the 19th century, with the revolution in transportation and farming technology, cost of selling wheat to distant parts of the world fell. Despite the benefits of lower prices to consumers, countries such as Italy and France imposed tariffs to protect the income of domestic farmers.
Globalisation
Globalisation refers to the integration of the worlds’ markets in goods and services as well as flows of investment and people across national boundaries, leading to convergence of prices of goods across countries (but less so of wages)
It should lead to falling import prices, rising export prices and declining price gaps between importing and exporting countries (affected by protectionist policies)
19th century globalisation: Trade costs and barriers to the mobility of capital and labour fell. due to the introduction of steamships on long-distance routes which reduced transportation costs. Price gaps in commodities such as wheat prices decreased over time between U.S. and U.K.
Interwar period: Deglobalisation
International price gaps rose during the interwar period & 1929 Great Depression due to government intervention where countries attempted to solve unemployment and economic insecurity by implementing protectionist policies such as taxes, barriers to trade, capital controls, immigration restrictions
Late 20th century
Trade costs and barriers to mobility of capital and labor fell again
Result of more liberal policies and technological change
National boundaries continue to be important barriers to global integration of markets
Measuring the extent of globalisation
Measuring trade in a country, region or world over time: Using trends in the share of imports, exports, total trade, increase in exports as a share of world GDP means an increase in trade and a more globalised world
Measuring the additional cost associated with exporting goods relative to selling them domestically:
Price gap: A difference in the price of a good in the exporting country and the importing country (includes trade cost: transportation and trade taxes). Smaller price gap indicates lower trade costs due to countries closer and the world more globalised
Arbitrage: explains why the price gap should tend to equal to the sum of all trade costs, When traders engage in arbitrage, they lower the supply of goods in the export market, driving up the prices, and increase the supply of goods in the import market, lowering the price. This causes the price gap to decline, until the point where price gap equals trade cost, to the point where arbitrage no longer profitable
Basic concepts of the global economy
Possibility of mutual gains and also conflicts over how gains will be distributed.
Resulting outcomes may not be Pareto efficient (there may be technically feasible mutual gains that remain unrealized).
The resulting distribution may seem unfair in the eyes of many.
Well-designed government policies can improve the efficiency or fairness of the outcomes.
Comparative advantage
A person or country has comparative advantage in the production of a particular good, if the cost of producing an additional unit of that good relative to the cost of producing another good is lower than another person or country’s cost to produce the same two goods.
Calculated using opportunity cost ratio. Trade must be more than what they could make themselves and lower than the opportunity cost
Idea is that specialising in production can yield more production for each good, and one should specialise in the good they have a comparative advantage at, even if the cost of producing may be lower if the other produces.
Government policies to counter transnational market exchanges
1) Imposition of tariffs on imports that discriminate against good produced abroad
2) Immigration policies regulating the movement of people between nations
3) Capital controls limiting the ability of individuals or firms to transfer financial assets among countries
4) Monetary policies that affect exchange rate and alter the prices of imported or exported goods
Tariff and its effects
Tax on imported goods produced abroad and sold domestically, raises the price of imported goods above the world price by the amount of the tariff
Graphical changes:
- Consumer surplus shrinks due to higher price
- Producer surplus increases due to higher price, which incentivises domestic producers to increase Qs
- Quantity of imports is reduced
- Revenue for government is created
It moves the domestic market closer to the equilibrium without trade, total surplus reduces due to DWL. However, this may be used to protect domestic producers and workers in a specific industry OR allowing a industry to develop before facing competition with procedures governed by WTO (different purposes)
Protectionist policies
Measures taken by a government to limit trade; to reduce the amount of imports. Designed to protect local industries from external competition.
Tariffs and quota
Balance of payments accounts
= current account (CA) + (capital and financial account)
Records all payment transactions between the home country (households, firms, and government) and the world
Capital and financial account
Records the flow of funds arising from inward and outward foreign direct investment (FDI) and the sale and purchase of portfolio investment between countries including “hot money” flows).
Current account (CA), CA deficit, CA surplus, net capital flows
CA is a record of a country’s international transactions with the rest of the world, comprising of trade balance and income balance. Trade balance refers to the value of the difference between export revenue and import expenditure. Income balance comprises of wages, interests, profits flowing into and out the country as well as government contributions to and receipts.
Trade surplus (exports > imports) implies a country is lending and nationals are lending to trading partners so that they can pay for these exports
Trade deficits (imports > exports) implies a country is borrowing and residents are making more international payments than they are receiving so the country has to borrow to cover the excess payments it is making to the rest of the world
CA surplus is a source of foreign exchange and is either used to purchase foreign assets such as factories (FDI) or financial assets (private net capital outflow) or it adds to the country’s official foreign exchange reserves
Foreign portfolio investment
A use of foreign exchange
= investment from foreign countries in stocks and bonds (inflows) - foreign investment in other countries stocks and bonds (outflows)
The acquisition of bonds or shares in a foreign country. But holdings of foreign assets are not sufficiently great to give the owner substantial control over the owned entity, receives dividends in future
Foreign direct investment (FDI)
Ownership and substantial control over assets in a foreign country, receives profits in future
