ECO14: Int Trade 1: benefits of free trade, CA, AA And policies

List the benefits of free/international trade. (5)

Advantages of Free-Trade 

1. Increased Competition 

   1. Countries import goods which compete with domestic producers. Countries also export goods which means more pressure and competition for domestic producers. This results in many benefits seen below. 

2. More Consumer Choices

   1. They now have access to goods of varying price and quality. 

3. Greater Efficiency in Production (EoS)

   1. Obviously with greater competition firms would be forced to be cost-efficient and innovate. 

   2. Free-Trade increases size of market for firms, allowing more of them to reap EoS

4. Acquiring needed (scarce) resources/Sharing of Knowledge

   1. Many countries like Singapore have to import water, and many countries have to import oil, this is a result of free-trade. 

   2. Hence, they will export goods and services in order to earn foreign currency and buy the required resources

5. Better jobs and economic growth

   1. Companies move to places where its cheaper to produce goods, while also creating jobs in those areas
      

   2. Disadvantages of Free-Trade (Rarely asked) 

      1. Job losses in developed countries

         1. Where importing labor is cheaper, workers in the original country may lose their jobs

      2. Harm to the environment

         1. More trade means more transportation, which uses a lot of fuel and contributes to pollution

      3. Widening wealth gap

         1. Income inequality type shit

      4. Exploitation concerns

         1. Companies might take advantage of workers in poorer countries by paying them very little

Define Free Trade

Free Trade

Definition: The absence of government intervention of any kind in international trade, so that trade takes place without any restrictions between individuals, firms or governments of different countries

what are the assumptions of the AA and CA theories. (8)

1. Two countries only 2) Two goods only 3) No transport costs 4) Free Trade, No Trade Barriers 5) Resources/FOPs are mobile within a country and are equally productive in both countries 6) Constant OC costs (Thus straight line PPC) 7) Constant returns to scale (Increasing the scale of production will not change the production efficiency). 8) Static Technology state, Perfect Information.

Define & Explain what is Absolute Advantage and how it is shown on a diagram.

Absolute Advantage 

Define: A country has AA relative to another country if they can produce a good with fewer resources (Absolute) than another country (A.k.a, with the same quantity of resources, it can produce more of the goods than the other country) 

Or in other words, when a country can produce more of a certain good compared to another country with the same amount of absolute resources. 

Diagram, if a country cuts a certain axis above that of another country.= abs advnatage.

Explain the theoru of comparitive advantage and its diagramatic representation/calculation.

Eg what characteristics of the curve tell us who has the CA?

Comparative Advantage

Define: A country is at a CA to another country if it can produce a good at a lower OC than the other country. (These means that unlike AA, we are not comparing absolute costs but relative costs which are more important) 

The new theory implies that a country should specialise in producing goods and services when they have a lower opportunity cost compared to another country and then trade. 

Specialise: means divert all their resources to producing that one good of which they have a lower opportunity cost compared to another country and then trade. 

This theory also showed that countries can still gain from specialisation and trade even if one country has the absolute advantage in both goods. It is only necessary that countries have different opportunity costs for their goods. 

Diagrammatically (Depends on relative slopes of PPCs): Country with the flatter PPC slope for one good (ie. its displacement relative to the axis), has the CA in that good since the gradient (OC) is gentler.

Gradient Trick to quickly memorise: Country with the flatter PPF has the CA in the x axis. 

Chan’s Rule” Closer to good = better CA.    Think: Closer to your heart = produce more. 

weakneseses/limitations of the theory of the CA 3 main, first has 7 sub points

Weaknesses of the Theory of Competitive Advantage. 

This theory formed the basis and justification of major policy trends and changes amongst governments since the early 1990s, where they moved toward trade liberalisation because the theory states how global trade increases global production and consumption and improves the global allocation of resources, thus it is meaningful to know the limitations

Depends on Unrealistic Assumptions: 

1. FOPs are assumed to be fixed, and do not move from country to country. In the real world labour move and quality of goods change, which means that factor endowments change over time, causing CA to change. 

2. Technology is assumed to be at a fixed state. However this is obviously not true in today’s world, changes in tech causes changes in CA. 

3. There is assumed to be perfect mobility of FOPs within a country. Means that FOPs can be instantly and costlessly moved from one line of production to another. In the real world, switching costs may be high and may affect CA. 

4. Assumes full employment of resources (ie. countries produce on their PPC). Developing countries may not have Full employment, causing a very different actual CA. 

5. Assumes presence of Free Trade. 

6. Assumes products are Homogenous

7. Ignores Transportation Costs
   

8. 
   
   Specialisation according to CA may not allow necessary structural changes to occur in an economy: If a country like Africa for example, who has a CA in agriculture, keeps producing and exporting agriculture according to the theory, it prevents them from becoming more industrialized and becoming more advanced. 

   
   

   CA theory may lead to excessive specialisation:  Countries who have CAs in only one or a few products may over specialise in their products, making them vulnerable as their economy is over dependent on the export of that good 

List the forms of trade protectionism on free trade, their diagrams, and their respective evaluations

1. Tariffs

2. Import Quotas

3. Production subisdies/Export Subsidies

4. Administrative Barriers