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Absolute advantage
When a country is able to produce a good using fewer resources
Comparative advantage
When a country is able to produce a good at a lower relative opportunity cost
Evaluations of comparative advantage
It assumes there’s only two traded goods and countries, assumes all goods are homogenous, assumes there are no EoS, ignores transport costs, ignores external costs from trade, and assumes a constant opportunity cost.
Example of absolute advantage
Zambia in copper production due to its huge ore reserves leading to obvious gains from trade and specialisation if Zambia exports copper
Absolute disadvantage
A country that is inefficient at producing anything compared to other countries
Limitations of comparative advantage
It assumes perfect mobility of FoPs, the PPF model is overcomplicated (lines should be curved but are straight), doesn’t consider transport costs e.g for landlocked countries, doesn’t consider external trade costs (pollution, tariffs, subsidies).
Types of free trade restriction
Tariffs, quotas, subsidies to domestic producers, non-tariff barriers such as health & safety regulations
Protectionism
The use of economic policies to regulate trade between countries to reduce imports. It also can help protect jobs.
Dumping
The sale of goods at less than cost price by foreign producers in the domestic market. E.g China exporting steel to the US which can be harmful to local industries as it undercuts their prices.
Why restrict free trade?
Prevent trade wars (Trump & China 2018), prevent dumping, reduce local unemployment, increase the fiscal account, reduce dependency, increase national security, protect jobs, reduce monopoly power of global firms, protect industry standards (US chlorinated chicken).
Advantages of tariffs
Protect domestic industries, increase gov revenue, encourage domestic protection, improve the balance of payments
Disadvantages of tariffs
Higher prices for consumers, trade wars, job losses in import dependant industries (technology, pharmaceuticals and steel), harmful to developing countries, reduced efficiency, inflation.
Benefits to removing trade barriers
Increase international trade, encourage positive relations with other countries, increased competition
Impacts of protectionism on consumers
Higher prices and reduced choice
Impacts of protectionism on producers
Protection of domestic industries, higher costs of input goods, and less incentive to innovate
Impacts of protectionism on the government
Increased revenue, potential trade wars, and increased control of key secotrs to ensure national security
Impacts of protectionism on living standards
Decline in living standards from higher prices and slowed economic growth
Impacts of protectionism on equality
Could help protect jobs, could harm lower income individuals
What are the main aims of the WTO
To negotiate trade agreements, and settle disputes between countries
Benefits of the WTO
Promotes free trade, resolves disputes, promotes economic growth, helps establish global trade standards, encourages development, reduces protectionism
Drawbacks of the WTO
Favours developed countries, increases competition for developing countries, slow decision making, prioritises trade over environment and labour standards, harmful to domestic industries
