Unit 6 - International Trade Flashcards
State
Types of international trade
**Home local trade **- within borders
Regional trade - trade amongst neighbouring countries
Bilateral trade - between two countries
Multi-lateral/International trade - amongst three or more countries
Give Reasons for trade
- we may lack resources
- lack certain technologies, therefore to lower cost of production
- Economies of scale, reduce cost per unit
- Surpluses and Deficits
- Foreign exchange earnings
- Employment, that leads to economic growth and development
- International peace and Harmony
- Choice and variety
- Competition (prices and efficiency )
- Resource endowment
Define
Absolute advantage
If a country can produce more of a good or service given the same amount of resources
Define
Comparative advantage
When one country has absolute uncertainty in production of both goods and services
Therefore a country should produce the good for which they have less opportunity cost
What assumptions are made for the theories of absolute and comparative advantage?
- only two products traded buy only two countries
- Production and opportunity cost are constant (linear PPC)
- no transport costs
- Perfect factor mobility
- no barriers to trade
- Equal Exchange rates
- Absolute balance of power between nations and no obligations
What other theories exist for determining trade?
- Competitive advantage - focuses on actual cost of production, produce where you have a lower cost.
- Factor endowment - Focuses on quality and quantity of factors of production
- Governmental policy - government may decide not to specialise to avoid over dependence or exhaustion of resources by diversifying production.
Why would a government employ protectionist policies on trade?
To prevent free trade and protect domestic economies from foreign competition and dependence on trade
What are the motives for tariffs?
To raise revenue and increase supply of the products on the domestic market (discourage consumption of imports)
Explain how export subsidies protect domestic economies?
Subsidies are given to exporters and domestic firms competing with imports, to make their goods more price competitive and a higher output
How do exchange controls protect?
Limits the amount of foreign exchange that can be purchased and limits access to to foreign currencies meaning importers can not import as much, so consumers turn to domestic products
Define
Embargoes
Complete ban on imports of a particular good or trade with another country entirely
Define quotas and how they affect imports?
Restrictions on the maximum quantity of imports that can be purchased
Leads to higher prices op goods for consumers and forces them to demand less domestically produced goods.
How do administrative restrictions protect ?
Bureaucratic procedures make it very difficult for importers to bring their goods into economies and may set artificially high prices for imports to discourage consumption.
How do VERs protect ?
Voluntary export restraints are agreements that governments pressure countries to sign to limit imports and used often to avoid retaliation as the export countries sign them “willingly”
Keeping exchange below its real value. How does it protect?
Manipulation of the exchange rate gives producers a competitive advantage over importers
Describe the employment argument for protectionalism ?
When we buy imports we create jobs in forest markets one reduce those in our domestic economies so protectionalist aim to reduce unemployment.
Infant industry argument for protectionism?
Trade barriers placed to protect infant industries as they grow to be able to compete with already large and established economies
Risks - industries may not survive without the protection or may fail before hend and there is no way to be sire which ones will succeed
BOP argument for protectionism.?
Governments may apply barriers to improve their account positions if imports fall with held exports constant bop is in a better position.
Labour exploitation argument
Moral reasons eg. Child labour or underpaid workers (absolute advantage for labour), it he import very cheap goods made with child labour domestic firms suffer because of higher cost of production
Dumping argument
Selling goods below their cost of production or selling substance to foreign markeQts an from growing d preventing new firms in there markets from growing navel destroying established competition
Revenue arguments
Tariffs give more tax to our governments
Strategic industry argument _
Country chooses to produce goods itself to protect the country in cases crises as to avoid dependence on countries with which there is tension.
Arguments for free trade
Prevent countries from specializing in the product in which they have comparative advantage
- Reduce international competition and so increase prices and lower the quality of the products.
- Reduce the choice of products available to consumers.
- Lower the size of firms’ markets and so reduce their ability to take advantage of economies of scale.
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Reduce firms’ choice of raw materials and capital goods which may increase costs of production - Result in trade war, with tariffs pushing up prices.
What is TOT
Rate at which the goods of one country
exchange for the
goods of another country.
Ratio of export prices to import prices
Define
Depreciation
fall or decrease in the international value of a currency caused by
market forces.
Such a fall will cause a reduction in export prices
in terms of foreign currencies and a rise in import prices in terms of the domestic currency:
Reasons to buy a currency
purchase goods and services from the country
• invest in the country
• enable foreign travel to be tourists in the country
• speculate on making a profit if the value of the currency should rise in the future.
Define
Appreciation
increase in the international price of a currency caused by market forces.
Factors affecting exchange rate?
- Interest Rates
- Inflation
- Expectations
- Current Account
- Competitiveness of goods
- Economic Growth
- Buying a Currency
