4.1 International Trade

International trade

The trading of goods and services between countries

Developing/emerging economy

One where people have a lower standard of living and less developed industries than other countries

Economic development

Measures how living standards and people’s general welfare in a country change over time

Advantages of international trade

Wider range of goods available to people due to specialisation

Economies of scale reduces costs

Lower prices due to competition

Larger markets for firms to buy raw materials from

The costs of international trade

Transport costs e.g. question of emissions from food miles

Negative externalities from production and consumption

Risk of structural unemployment as patterns of trade change

Rising inequality – uneven gains from trade

Pressure on wages and working conditions

Risks from global (external) external shocks

Problems with international trade 

Distance

Language barriers/loss of culture 

Transportation difficulties

Risk in transit

Lack of information about foreign firms

Protectionism

Government and documentation/red tape

Study of foreign markets 

Problems in payments 

Frequent market changes

Investment for longer periods

Intense competition/global demand dominated by some economies

Social cost of transport pollution

Trade for developed countries

Advantages:

Access to raw materials/natural resources they don’t have

Widens consumer choice

Trade widens the market for their output

Disadvantages:

Closely integrated countries are more susceptible to external shocks e.g. 2008 financial crisis

Trade for developing countries

Advantages:

Benefit the least

People have small spending power and lack of skills

Small firms mean economies of scale can’t be enjoyed 

Lack of expertise in capital and technical advances

Disadvantages:

Heavy reliance on primary activity (volatile prices, low skill)

IMF encourages LDC’s to trade more but they still find it difficult to enter overseas markets 

Why is trade important for developing countries?

A source of foreign currency to help a nation’s balance of payments (trade surplus countries build up US$ reserves)

An important way of financing imports of essential imports of capital equipment / technologies and energy supplies

An injection of demand into the circular flow of income and spending + creating positive export multiplier effects

Increased employment in export industries and related industries and rising per capita incomes and strong HDI scores

Falling prices for consumers helps to increase real incomes e.g. by opening up monopoly suppliers of energy to new competition