3.2.4 International trade and the global economy

Comparative Advantage

Specialise where opportunity cost is lowest

Trade

Buying or selling g/s from other countries

Free trade

Countries & businesses can trade without any restrictions

3 Benefits of international trade

Increased competitiveness, strong inter-country relationships, wider variety of products

3 Consequences of international trade

Environmental issues, reliance on other countries, competition for domestic businesses

Advantage of Free Trade Agreements

Creates trade between countries

Disadvantage of Free Trade Agreements

Moves trade away from countries outside the agreement which could be ”better”

Globalisation

The increasing interdependence of businesses & countries

4 features of globalisation

Less protectionism, increased international trade (MNCs), increased innovation, EoS

A benefit of globalisation for producers in developed countries

Increased revenue (from domestic and foreign consumers)

A drawback of globalisation for producers in developed countries

Increased competition from countries with lower costs

A benefit of globalisation for consumers in developed countries

Increased choice, decreased prices (from less trade barriers)

A drawback of globalisation for consumers in developed countries

Environmental damage from transportation

A benefit of globalisation for workers in developed countries

Increased wages from derived demand

A drawback of globalisation for producers in developed countries

Increased unemployment from increase in supply of labour

A benefit of globalisation for producers in developing countries

Increased R&D

A drawback of globalisation for producers in developing countries

Capital flight (MNC profits are taken back overseas)

A benefit of globalisation for consumers in developing countries

Increased economic growth and Foreign Direct Investments (FDI)

A drawback of globalisation for consumers in developing countries

Income inequality

A benefit of globalisation for workers in developing countries

Increased employment and higher wages

A drawback of globalisation for workers in developing countries

Exploitation and increased vulnerability to deindustrialisation

Moral considerations of globalisation

Decreased diversity as the world becomes more aligned with western culture

Ethical considerations of globalisation

Exploitation of workers and sweatshop labour

Sustainability considerations of globalisation

Increased risk of negative production externalities and loss of finite resources

• Benefit the workforce of LICs

  • Specifically the secondary sector

  • However they experience the environmental impacts more severely

  • Also suffer from labour exploitation

• Economic growth from GDP increase

  • Increase in exports = more money inflow

Patterns with MNCs

Exchange rate

Shows the value/price of one currency in terms of another

SPICED

Strong Pound Imports Cheaper Exports Dear

WIDEC

Weak (pound) Imports Dear Exports Cheaper

Why would producers prefer a weaker pound

For foreign firms their products would be cheaper, making them more competitve

Why would consumers prefer a stronger pound

Consumer spending from foreign countries would be cheaper

What is demand in terms of exchange rates

Foreign currencies exchanged for pounds

What is supply in terms of exchange rates

Pounds exchanged for a foreign currency

• Inflation

• CA Deficit

• Political stability/economics performance

• Public debts

• Interest rates

• Terms of trade

• Relative strength of trading partners’ economies

• Speculation

Factors that influence supply/demand of a currency

Hot money flows

Capital flows moving to countries with higher interest rates and expected changes in exchange rate