4.2.6.2 Trade and the Changing Patterns of Trade

absolute advantage

when a country can produce more of a good at a lower cost per unit than another country

comparative advantage

when a country can produce a good at a lower opportunity cost than another country

specialisation

when a country focuses on producing a good/service that they have an advantage on

deeper specialisation and benefit of EofS, more competition(consumer choice/efficiency), lower prices of foreign firms increases consumer surplus

Advantages of Specialisation and Trade

negative externalities, structural unemployment(UK ship building industry), inequality as benefits of globalisation are shared unequally, risk of exogenous shocks, pressure for real wages to fall, lower prices of foreign firms reduce producer surplus

Disadvantages of Specialisation and Trade

geography, primary product dependence, emerging economies, trading blocs, exchange rates, comparative advantage

Factors affecting the UK’s pattern of trade

gravity theory

• Geographical Pattern of Trade

• countries tend to trade most with nations in closest proximity

inter-regional - between different regions, intra-regional - same region

Difference between inter and intra regional trade

55, exports, US, 7, imports, 1.5, 1999

AO2: Geographical Pattern of Trade

In 1999, the EU accounted for ____% of UK _____, however, the ___ is now its biggest trading partner and China now accounts for ____% of UK _____ compared to ____% in _____

primary product dependence

• Commodity pattern of trade

• The extent that a country has a dependence on a certain export

• This changes as countries move through different stage of development

Angola exports are 89% crude petroleum; Zambia’s is 80% raw copper

AO2: Commodity Pattern of Trade

import and export more(international competitiveness), attract MNCs, currency volatility in emerging maarkets can impact commidty and raw material prices, rising tension with developed nations

AO2: Emerging Economies

Huawei from China; Tata from India; Lukoil from Russia; Petrobus from Brazil

AO2: emerging economies attracting MNC activity, as well as their own MNCs

Trade blocs

• Pattern of Trade

• consists of a number of countries that agree to trade with each other with reduced barriers

• often lead to more intra-regional(within) and less inter-regional trade(outside)

  • less benefit from specialisation according to a countries comparative advantages

preferential, free, customs union

different kinds of trade blocs

preferential

reduced protectionalism on certain good/services amongst the countries involved

free trade

complete _____ ____ between the countries but each country can set their own trade restrictions on countries outside the agreement

customs union

complete free trade between all the countries involved and they all agree to impose the same trade restrictions on other countries

Exchanges rates

• Pattern of Trade

• The price of one currency in terms of another

• SPICED/WPIDEC

floating exchange rate

FOREX market determines price of currency

fixed/pegged exchange rate

gov/monetary authorities determine the exchange rate