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define international trade
the exchange of goods and services between countries
Explain how lower prices is a gain of international trade
consumers are able to buy less expensive products and producers are able to purchase less expensive raw materials and semi-manufactured goods
prices may be lower in some countries than others because of:
access to natural resources
differences in the quality of labour forces
differences in the quality of capital and the levels of technology
Explain how greater choice is a gain of international trade
consumers now have access not to just domestically produced products but also to international products
Explain how acquisition of resources is a gain of international trade
different countries possess different resources
trade resources you have for resources you dont have
import what and export technology
import oil and export manufactured goods
export goods or services, in order to earn foreign currency and so buy the required resources
Explain how increased competition is a gain of international trade
domestic firms compete with foreign firms
lead to greater efficiency and may mean that consumers gain by being offered cheaper goods and services
quality and variety of goods available to consumers will increase
international trade ensures a competitive market, globally, with low prices and high output
Explain how more efficient allocation of resources is a gain of international trade
when international trade takes place freely, without government interference, then the countries that are best at producing certain goods and services will produce them
able to produce these goods and services at the lowest cost and take advantage of their efficiency
if this happens in all of the different trading countries, then world’s resources are being used most efficiently when free trade is taking place
Explain how economies of scale is a gain of international trade
because of international trade, the size of the market, and thus demand, will increase
therefore, level of production and the size of production units will also increase and production should become more efficient
larger production units will enable the amount of specialization to increase
Explain how source of foreign exchange is a gain of international trade
international trade enables countries to obtain foreign exchange
if a country exports products, then that country will be paid in foreign currencies
this is especially important to countries which do not have a convertible currency
name the 9 gains from international trade
lower prices
greater choice
acquisition of resources
increased competition
more efficient allocation of resources
economies of scale
source of foreign exchange
access to larger markets
more efficient production
name the two qualities of free trade
absence of any form of government interference with the free flow of international trade
goods and services are allowed to move freely between countries
what is protectionism
any departure from free trade designed to give some protection to domestic industries from foreign competition
Name the four different types of protectionism
tariffs
subsidies
quotas
administrative barriers
is there any point in trading if Sworld is above Pe
No! Cuz no one would buy foreign producers
what is a tariff? a specific tariff? ad valorem tariff?
tariff: tax or duty placed on imports
specific tariff: tax set as a fixed amount per unit of good or service
ad valorem tariff: tax depends on value of goods or services - usually a percentage of the price of the product
what do tariffs do?
raises price of imported goods
offers protection to the domestic producer
shifts the world supply curve upwards by the amount of the tax
prevent anti-dumping:
place a tariff on the imported goods to raise their prices and eliminate the cost advantage of the dumped imports
what are the impacts of tariffs
importers must pay higher prices for the imported good which will be passed onto the consumer
there is a dead-weight loss of welfare because there is a loss of consumer surplus because of the product not now purchased
inefficient use of resources - inefficient domestic producers continue producing
what is a subsidy?
an amount of money the government gives to domestic producers
what does a subsidy do?
applied to domestic goods to lower domestic prices and make them more competitive with imported goods and reduces costs of domestic produces
can subsidies be placed on exports? what does it do?
yes it can
lowers price to below true production costs and therefore makes them cheaper
protects domestic industry from foreign competition in the foreign market place
foreign producers are affected by artificially low prices
subsidy shifts the domestic supply curve down by the amount of the subsidy
what are the impacts of subsidies?
dead-weight loss of welfare
foreign producers would produce the increased domestic production for a revenue of x while domestic producers need revenue of x + y. Y represents the inefficiency of the domestic producers and a misallocation of the world’s resources, since more of the world’s resources are being used to produce the product than necessary
no loss of consumer surplus, because the price of the product does not change - however indirect affect because of opportunity cost: government will have to use tax revenues to fund subsidies or cut spending on other things
what is a quota?
physical limit imposed upon the amount of goods which may be imported
what is the impact of quotas?
dead weight loss of welfare
loss of quantity demanded
loss of consumer surplus
increased quantity produced by domestic producers is inefficient
what are the three types of administrative barriers? what do administrative barriers do?
make it expensive for importers to compete
1) red tape
2) health and safety standards and environmental standards
3) embargoes
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