4.1- (N/A) Economics

International Trade

Exchange of goods and services between countries

Benefits of trade

1. Greater choice of goods and service that improves living quality

2. Lower prices from international competition that allow household to choose goods that are cheaper

3. Allows countries to cooperate with eachother which enhances relationship between countries and reduce hostilities

4. Exchange of new ideas or technologies between countries

Benefit of free trade when world price is above domestic price

When world price is above domestic price, it allows domestic producers to export excess supply

Export revenue

Amount exported x World price

Benefits of free trade when price is below domestic price

Households and firms are incentivised to increase their imports. This is because they cannot compete with the lower prices and domestic supply contracts from Qe to Qs. Excess domestic demand (Qd-Qe) is met thru imports.

Comparitive Advantage

A country should specialize in a good/ service that can produce at the lowest opportunity cost. This causes volume of production to increase as well.

Absolute Advantage

Country is able to produce a good with lower fop than another country.

Sources of comparitive advantage

1. Natural resoirces

2. Labour forces

3. Tech

4. Capital & Infrastructure

5. Government support

6. Economies of scale

Function of Production possibility frontier (PPC)

illustrate gains from trade

Limitations of theory of comparitive advantage

1. Over-dependence: Specialisation creates dependence on other countries which creates vulnerability.

2. Environmental damage: Negative externalities arent taken into account by these theories which may harm the quality of life of local areas

3. Distribution of income: GDP/ capital is likely to increase but the dist of the extra income is likely to be uneven with those more wealthy gaining more

4. Structural Unemployment: Specialisation cause some industries to shut-down which results in unemployment (long-term unemloyed will rise).

5. Flawed assumptions

Flawed Assumptions in theory of comparitive advantage

1. No transportation cost: in reality it costs something to move goods/ services from one location to another

2. There is perfect knowledge: Countries always know what industry they have comparitive advantage in, and also about other countries-often unture.

3. Factor substitution is easily achieved

4. Constant COP: theory doesnt take into acc economies of scale that can be achieved by an inc in output.

Protectionism

Limiting free trade to protect its country through implementing import tariffs, export subsidies, quotas and embargoes.

Tariff

Tax imposed on imported goods/ services

Effect of tariff

It encourages inefficient domestic producers to increase output and market share. This is because foreign producers reduce their output due to tariff. And thru increasing domestic output, employment may increase as well.

Tariff impact on domestic producer

It encourages them to increase in output making them more efficient. This increase in output may also increase employment.

• After the tariff was imposed domestic producers produced 0Q₃ and their revenue was equal to P_w+tariff  x Q₃ 

Impact of tariff on foreign producers

Increase in price cause decline in output (Q3Q4) and thus decreasing their revenue too (Q4-Q3). This causs foreign producer surplus.

Impact of tariff on Domestic consumers

Domestic consumer purchase less products (Q4) due to increase in price (Pw + tariff). This causes domestic consumer surplus to decrease (area 1,2,3, & 4).

Impact of tariff at government

Receive tax revenue ((Pw+tariff)-Pw) x (Q4-Q3)

Impact of tariff on downstream producers

Since they rely on imported goods for the resource their COP will increase causing an increase in price of their goods/ services. This results in reduction of output and inc in unemployment levels.

Impact of tariff on society

• Less efficient domestic firms are now producing at the expense of more efficient foreign producers - there is a welfare loss equal to area 2

• Consumers are frustrated with the higher prices and there is no longer allocative efficiency - there is a welfare loss equal to area 4

• The net welfare loss is equal to areas 2 and 4