econ6: international trade

what are the advantages of international trade?

1. gains from exchange

2. facilitates economic growth

3. access larger capital and product markets

4. efficiency from increased competition

5. facilitates specialisation

6. facilitate flow of financial capital

7. enhances productivity

8. economies of scale

what are disadvantages of interational trade

1. income inequality

2. destories jobs in industries that compete against imports

tarrif, import quota, export subsidy, VER effects on

imports/exports price, domestic production, domestic consumption, trade, producer surplus, consumer surpluse, gov revenue, national welfare

	Tariff	Import Quota	Export Subsidy	VER
Affects	Importing country	Importing country	Exporting country	Importing country
Price	↑	↑	↑	↑
Domestic production	↑	↑	↑	↑
Domestic consumption	↓	↓	↓	↓
Trade	Imports ↓	Imports ↓	Exports ↑	Imports ↓
Producer surplus	↑	↑	↑	↑
Consumer surplus	↓	↓	↓	↓
Govt revenue	↑	Mixed	↓	No change (rent to foreigners)
National welfare	↓ (small); possibly ↑ (large)	↓ (small); possibly ↑ (large)	↓	↓

five types of trading blocs and key features

1. free trade area

• no barriers

• each country keeps own agreements with non members

2. customs union

• FTA + common trade policy against non members

3. common market

• customs union + free movement of labour & capital

4. economic union

• common market + common economic institutions and coordinated policies

5. monetary union

• economic union + common currency

why is regional intergation popular?

• easier, faster and less political than global WTO negotiations

• steps towards broader free trad e

what is trade creation?

• regional integration replaces higher cost domestic prpduction with lower cost imports

• more efficient resource allocation

• welfare gain

what is trade diversion

• lower cost imports from non members are replaced with higher cost imports from memebers due to tariffs

• less efficient resource allocation

• welfare loss

benefits of regional trade blocs

1. all standard free trade benefits

2. greater foreign investment

3. reduces potential for conflict

4. greater collective bargaining power

5. growth spillovers

cons of trading bloc

1. adjustment costs

2. national sovereignty concerns for smaller countries

3. challenges for deeper integration