International Trade

Gains from trade:

Gains from trade:

Refer to the gains from international trade that arise when countries specialise and trade according to their absolute or comparative advantage; may be in terms of increased output or increased consumer or producer surplus.

Free trade:

The absence of government intervention of any kind in international trade, so that trade takes place without any restrictions (or barriers) between individuals or firms in different countries.

Specialisation:

Occurs when a firm or a country concentrates production on one or a few goods and services. In international trade theory, specialisation forms the basis for the gains from trade, arising when countries specialise according to their comparative advantage, and when firms specialize in production of goods and services that offer them economies of scale.

Trade protection:

Government intervention in international tarde through the imposition of trade restrictions (or barriers) to prevent the free entry of imports into a country and protect the domestic economy from foreign competition.

Tariff:

Taxes on imported goods; they are the most common form of trade restriction. Tariffs may serve two purposes; to protect a domestic industry from foreign competition (a protective tariff); or to raise revenue for the government (a revenue tariff).

Quota:

A type of trade protection that involves setting a legal limit to the quantity of a good that can be imported over a particular time period (typically a year).

Export Subsidies:

A payment by the government to a producer or exporter per unit of the subsidised good, where the subsidy is paid for each unit of the good that is exported.

Administrative Barrier:

Trade protection measures taking the form of administrative procedures that countries may use to prevent the free flow of imports into a country; may include customs procedures involving inspections and valuation, controls on packaging, and others. Often considered to be a kind of 'hidden' trade protection.

Why do countries benefit from international trade?

Increased competition:

Graeter efficiency in production:

Lower prices for consumers:

Greater choice for consumers:

Acquiring needed resources:

Source of foreign exchange:

Access to larger markets:

Economies of scale in production:

Increases in domestic production and consumption as a result of specialisation:

More efficient allocation of resources:

Trade makes possible the flow of new ideas and technology:

Trade makes countries interdependent, reducing the possibility of hostilities and violence:

Trade as an engine for growth.

Effects of a quota: winners and losers

Winners:

• Domestic producers are better off.

• Domestic employment increases.

Neutral impact:

• The government neither gains nor loses.

Losers:

• Domestic consumers are worse off.

• Domestic income distribution worsens.

• Increased inefficiency in production:

• The exporting countries may be worse off or better off:

• Global misallocation of resources:

The total surplus lost is d,e,f.

Effects of a tariff: winners and losers

Winners:

• Domestic producers.

• Domestic employment in the protected industry.

• Government.

Losers:

• Domestic consumers.

• Domestic income distribution.

• Increased inefficiency in production.

• Foreign producers.

• Global misallocation of resources.

welfare loss is equal to d,f

Effects of production subsidies: winners and losers.

Winners:

• Domestic producers are better off.

• Domestic employment increases.

Neutral impact:

• Consumers are not affected.

Losers:

• The government budget.

• Taxpayers are worse off.

• Increased inefficiency in production.

• The exporting countries are worse off.

• A global misallocation of resources results.

Welfare loss is equal to area b.

Effects of export subsidies: winners and losers

Winners:

• Producers are better off.

• Domestic employment increases.

Losers:

• Consumers are worse off.

• Negative impact on the government budget.

• Taxpayers are worse off.

• Domestic income distribution worsens.

• Increased inefficiency in production.

• The exporting countries are worse off.

• There is an increase in the global misallocation of resources.

Welfare loss is equal to area b and d