Trade. Flashcards
What is trade?
International trade can be defined as the buying and selling of goods across international boundaries.
Why do countries trade?
- The basic reason is that countries are not able to produce everything that they want in todays society..
- Trade allows countries to specialise in producing the goods/services that can be produced efficiently.
- Goods are bought abroad because of their availability e.g. Coconuts from the Caribbean; and also product differentiation e.g. Cars are now branded and more UK people demand large American SUVs.
Arguments for trade.
- Increased consumer choice.
- Lower prices, through existence of economies of scale.
- Reduced domestic monopoly power.
- Increasing world output as a result of comparative advantage.
What is the World Trade Organisation?
They are responsible for the reduction of trade barriers and settle trade disputes.
-The WTO helps to resolve conflicts between nations and provide forums for agreeing over trade agreements and there implementation.
The aim of WTO is to help trade flow as freely as possible, except where free trade conflicts with other objectives such as environmental or legal.
What is comparative advantage?
This is the ability to produce a good or service at a lower opportunity cost than another country i.e. a country’s a comparative advantage in production of a good if it has to forgo the production of fewer other products in order to make it. The LAW of Comparative advantages states that countries should specialise in the production of a good in which they have a comparative advantage and then trade, causing global output to increase.
What is absolute advantage?
This is the ability to produce a good or service at a lower cost than another country.
Problems with comparative advantage and specialisation.
- Ignores transport costs (i.e it may be cheaper to produce sheep in the UK rather than pay for shipping from new Zealand)
- Ignores external costs of production.
- Ignores gains from economies of scale.
- Assumes factors of production can easily be switched from producing another ( which they can’t)
- Assumes perfect knowledge (which doesn’t exist)
- Reduces self-sufficiency.
Why protectionism?
- Protect infant industries and sunset industries
- Employment protection.
- Retain self-sufficiency .
- Tackle balance of payments current account problems.
- Retaliation
- Prevent dumping
- Prevent competition from countries with cheap labour and poor labour/environmental law.
- Protect strategic industries e.g. defence, essential foodstuffs, electricity generation.
What are the types of protectionism?
Tariffs - they are taxes on imported goods. They are also known as import or customs duties. They raise prices to consumers and restrict imports.
Quotas - are a physical limit on the quantity of imports. (Similar to tariffs however no tax revenue is raised, therefore larger welfare loss)
Domestic subsidies - These are grants given to domestic producers to enable them lower production costs thus lowering prices and should make a countries products more internationally competitive. Hard for WTO to tackle because its not overt protectionism and incurs an opportunity cost.
Non-tariff barriers- protectionism measures that do not necessary result in price increases, these might include restrictions on quality.
What a trading blocs?
Trading blocs are groups of nations who form an economic union or customs union. Free Trade Areas are blocs in which groups of countries agree to abolish trade restrictions between themselves but maintain their own restrictions with other countries. Custom Unions have free trade internally and a common set of protectionist measures. Eg EU, NAFTA and ASEAN.
They comply with the aims of the WTO in terms of creating trade between members, but they contradict the aims by causing trade diversion, where non-members are excluded from trade in favour of less efficient producers within the bloc.
What is Harmonisation?
Harmonisation is the process of creating common standards across the internal market.
Compare the EU to NAFTA.
The European Union aims at not just a customs union but also economic union – harmonisation of taxes / monetary policy and moves towards a single currency. NAFTA is the North Atlantic Free Trade association. Here, there is free trade, but, not the same degree of harmonisation as in the EU.
What is Dumping?
“dumping” is a kind of predatory pricing, especially in the context of international trade. It occurs when manufacturers export a product to another country at a price either below the price charged in its home market or below its cost of production.
How do trade blocs enhance globalisation?
- As well as increased integration amongst members of a trading bloc. It is argued trading blocks help globalisation through making global negotiations easier. For example, in the case of trade negotiations. The EU will negotiate as a single trading block making it easier to push through practises which increase free trade.
- However, trading blocks often don’t help the process of globalisation. For example, the EU’s CAP involved high tariffs on food imports and the dumping of surplus food items onto world markets.
- Rather than lead to greater globalisation, it is argued trading blocks create conflicting parties fighting for regional interests.
