free trade

define it

the unobstructed trade of goods and services between countries with no restrictions in exports and imports

advantages of free trade 6

1. comparitive advantages, where countries specialise and lower opportunity cost

2. trade creation. world supply is lower priced than domestic supply

3. increased exports. comparitive advantage allows for more demand for good

4. economies of scale. due to specialisation

5. surplus of raw materials. countries which export oil would not have a market without free trade

6. living standards and quality. consumers have lower priced goods with more range of products

disadvantages of free trade. 4

1. infant industry. if developing countries have industries that are new, they will struggle to compete internationally

2. senile industy. industries that are unproductive or declining. they are incentivised to invest if they are competing domestically.

3. protection against dumping. below cost which puts domestic firms at risk

4. enviromental probelms. argued that LEDC’s will use up natiral reserves to keep up with demand for products

what is protectionism.

when a country decides that the costs of free trade outweigh the benefits and protect their domestic markets.

why do countries want to engage in protectionsim 4

1. circular flow of income. imports represent a withdrawal from the flow

2. economic growth

3. current account

4. specialization

forms of protectionism 5

1. quotas

2. tariffs

3. embargos

4. regulation and red tape

5. curency manipluation

what is terms of trade.

measures the rate of exchange of one product when two countries trade

what is the terms of trade index

100X AXP/AMP

what could cause the terms of trade to improve in a country

when a country buys more imports with a given amount of exports

how can a countries terms of trade relate to competitiveness

the competitiveness of a countries exports determains the amount of imports they can buy and the terms of trade

impacts from a change in terms of trade 4

1. living standards. if terms of trade improve the level of imports rise which allows more access to foreign goods

2. current account. an improvement means that exports are relatively more expensive to imports which worsens the CC

3. cost-push inflation. if terms of trade worsen, imports are becoming more expensive

4. resource curse. this is when a developing country faces an appreciation in one industry such as raw materials which effects others reducing export competitiveness.

final exal for judgment

free trade doesn’t exist, always some level of government intervention. Ha Joon Chang