Trade

What is absolute advantage

When a country can supply a product using fewer resources than another

What is the comparative advantage

A country should specialise in producing goods and services where they have a lower opportunity cost than another conutry

How do you work out the comparative advantage of production. Use this example to make a calculation. Ghana producing 16 tonnes of cotton for 2 computers

Work out what each country is giving up to find out opportunity cost as a ratio. For example if Ghana made one tonne of cotton, the opportunity cost is 1/8 of a computer

What conclusion can be made from the opportunity cost ratio. Use Ghana example

The country with the lower ratio has more of a comparative advantage. Ghana should specialise in cotton production as they are using an 1/8 of a computer

How can we interpret the comparative advantage using the PPF

The country with a shallower PPF always has a comparative advantage for what’s on the x axis

What factors affect comparative advantage

• Natural resources

• Unit wage costs

• Infrastructure/capital investment

• Non-price factors e.g. product design/branding

• Import controls

• Exchange rate

What is a pattern of trade

The mix of goods and services that a country imports and exports in international trade

How do comparative advantages reflect patterns of trade

We export the goods and services that we have a comparative advantage of and import from countries with large comparative advantages

What is intra-regional trade

Trading witht countries in the same region

What is inter-regional trade?

Trading with countries in different regions

What is the gravity theory

Countries tend to trade with those in closest proximity e.g. within the EU

What is the commodity pattern of trade

The type of products that are traded internationally including primary, manufactured or service exports

State countries with high rates of primary

• Angola = 89% exports of crude oil

• Zambia = 80% exports of raw copper and cobalt

What are the main goods and services that the UK exports

• Power turbines

• Pharmaceutical products

• Aircrafts

• Financial services

• Travel

What are the main goods and services that the UK imports

• Cars

• Gas and oil

• Fruit and vegetables

• Clothing

• Travel and tourism

What are the gains from trading

• Competition from lower cost import sources drivers down market prices

• Reduced monopoly power

• Specialising allows exploitation of economies to scale

• More investment in R&D, innovation and human capital

• Competition improves discipline

What are the costs of international trade

What are protectionist policies

Government policies designed to restrict imports and protect domestic industries from foreign competition

What is a tariff

A tax on imported goods. Raises the price to decrease demand and encourage domestic businesses

What is a quota

Limits on the quantity of a good that can be imported. Restricts supply to encourage domestic businesses

What are export subsidies

Gov financial support to domestic firms to make exports cheaper and more competitive

What is trade liberalisation

Removal or reduction of trade barriers to encourage free trade

What is a trade bloc

A number of countries that agree to trade with each other with reduced or no trade barriers

Why do some countries adopt protectionist policies

• Reduced trade/current account deficit

• Protecting infant industries

• Correcting market failure from demerit goods

• Protect domestic employment

What are the consequences of protectionist policies

• Can lead to loss of allocative efficiency

What is a customs union

When there is complete free trade between countries involved in a trade bloc and they agree to impose equal trade restrictions on other countries

What is the impact of exchange rates on trade patterns

A strong currency makes exports appear more expensive and imports relatively cheaper

What is a floating exchange rate

Currency is determined by demand and supply on the foreign market

What is a common/single market

A deeper integration between participating countries extending beyond trade to include free movement of labour and lower capital controls

What are the characteristics of the Single European Market (4 freedoms)

• Free Trade in Goods and Services

• Mobility of labour

• Free movement of capital

What are advantages of joining the EU cingle market

• Import-tariff free access

• Easier to access FDI

• Access to EU structural funds

• Better access to EU capital markets

What is the role of the World Trade Organisation

They permit trade blocs

What are the main reasons for trade barriers

• Allegations of export dumping

• Lare trade deficit

• Providing employment protection in key and growing industries

• Raising tax revenue

• Response to impact of recession

How can trade liberalisation increase economic efficiency

• Allocative - increased competition = lower prices

• Productive efficiency - trade encourages firms to benefit economies of scale

• Dynamic - trade drives R&D