4.1.3 Pattern of trade

what are the significant changes in pattern of trade?

what are the significant changes in pattern of trade?

• growth of trading blocs

  • formation and growth of trading blocs (e.g. EU, NAFTA) which encourage greater free trade amongst members, whilst discouraging trade outside the bloc → significant trade creation across the globe

  • majority of leading economic nations operate within a trading bloc and have several agreements with other nations

• emergence of Middle Income Countries (MICs)

  • countries (e.g.India and China) have become significant global players in terms of all aspects of trade

  • collapse of communism in Russia and other Eastern bloc states has opened up global markets significantly

factors influencing the pattern of trade: comparative advantage

• developed countries have utilised developing countries as a source of cheap production in terms of lower costs of raw materials and labour

• improvement in production costs and lower inflationary pressure generated as a consequence has improved the real incomes of consumers of developed countries and boosted their standard of living

• decline of manufacturing in developed countries has led to reduced negative externalities in production in those countries

• however, many developed countries have experienced structural unemployment as a consequence of businesses relocating production to low wage economies

factors influencing the pattern of trade: impact of emerging economies

• increased trade has enabled emerging economies to participate

  more effectively in the global economy.

• many have become more integrated into competitive markets and have generated significant income and wealth for their citizens → increased income and wealth → creation of job opportunities, which can assist in the reduction of poverty

• however, many developing countries may find it hard to access

  large markets if they are not members of that trading bloc, e.g. producers of agricultural products in African nations will have to pay large export duties to sell their products in the EU because of the Common External Tariff

• pace of growth of emerging economies → large rises in the prices of primary resources and foodstuffs, which has been extremely beneficial in terms of revenues for developing economies, but may not encourage economic diversity which may harm them in future years or in an economic downturn

factors influencing the pattern of trade: growth of trading blocs

• trading blocs governments of a group of countries agree

  to trade together freely i.e. normally with no trade barriers

  ◎ There has been significant growth of trading blocs in the last 50 years

  ◎ This has led to increased trade between countries that are in the

  trading blocs as it removes barriers to trade

  ◎ Bilateral agreements occur when two countries agree to trade at

  preferential terms

  ◎ This leads to increased trade between the two countries

  ◎ After Brexit the UK is looking to increase the number of bilateral

  agreements it has with other countries, something it was unable to do

  as part of the EU

factors influencing the pattern of trade: changes in relative exchange rates

• exchange rate is the price of one currency in terms of another e.g. $ v £

• appreciation in the exchange rate → fall in exports as the price of UK goods and services abroad will increase

• will depend upon the elasticity of the product e.g. petrol is price inelastic

◎ Therefore, we will still import petrol but at a higher price

◎ This will increase the cost of imports even though the volume of

imports will fall

what is a relative exchange rate

price of one currency in terms of another

how does comparative advantage influence the pattern of trade?

• countries will trade where there is a comparative advantage to trading.

• change in the comparative advantage will affect the trade pattern.

• there has been a recent growth in the exports of manufactured goods from developing countries to developed countries as developing countries have gained an advantage in the production of manufactured goods, due to their lower labour costs, so production shifted abroad.

• deindustrialisation of countries such as the UK → manufacturing sector has declined → production of manufactured goods has shifted to other countries, such as China, whilst the UK now focuses more on services, such as finance → industrialisation of China and India, whose share of world trade has risen and the volume of manufactured goods that they export has increased.

• However, since China's population is now ageing, their wage competitiveness has fallen.

  • this is also due to the rise of the middle class in China, who demand higher wages and consume more.

how do emerging economies influence the pattern of trade?

• countries grow at different rates and when they grow, they are likely to need to import more goods and services than before as well as exporting more to pay for this.

• emerging economies shift the trade pattern by taking up a larger proportion of a country's imports and exports than they had previously, e.g. China.

• international trade is arguably more important for developing countries than developed countries: it contributes towards 20% of LDC economies compared to 8% of the US economy.

• collapse of communism → more countries, especially developing countries, are participating in world trade.

how do trading blocs and bilateral trading agreements influence the pattern of trade?

• increase the level of trade between certain countries → influence the pattern of trade because trade increases between these countries and decreases between others.

• joining the EU → UK traded a lot more with European countries than previously, and less with countries outside the EU.

how do relative exchange rates influence the pattern of trade?

• exchange rate affects the relative prices of goods between countries.

• prices are an important factor in determining whether consumers buy goods; change in price will affect the pattern of trade.

• UK's trade deficit with Europe → strength of the pound.

• China have kept their currency weak in order to increase their trade surplus by making exports more competitive.

what is the pattern of trade?

refers to the types of goods and services that countries exchange and indicates shifts in a country's economic makeup and trade strategies.