Understanding the Economy: International Trade

PART 1: INTERNATIONAL TRADE

INTRODUCTION

International Trade - Definition:

  • Definition: The ‘sales and purchases of goods and services that take place across international boundaries’ (Lipsey and Chrystal, 2015).

  • Context: Firms are integrated into the global economy through international trade, as indicated by Sloman and Jones (2017).

  • Ubiquity: International trade is part of daily life (Begg et al, 2014).

  • Economic Impact: Without international trade, global wealth would significantly decrease (Sloman, Garrett, and Guest, 2018).

ADVANTAGES OF INTERNATIONAL TRADE

  • Resource Distribution:

    • Countries cannot produce all they require due to uneven resource distribution, necessitating access to resources through trade.

  • Consumer Benefits:

    • Trade results in a larger variety of goods and services, increased competition which leads to lower prices and more innovation.

  • Market Demand:

    • Access to international markets potentially increases demand, leading to economies of scale.

  • Knowledge Exposure:

    • Firms may gain exposure to new ideas, knowledge, and skills.

DISADVANTAGES OF INTERNATIONAL TRADE

  • Transport Costs:

    • Higher logistics costs associated with international shipping.

  • Currency Exchange Costs:

    • Financial implications of converting currencies for trade.

  • Compliance Costs:

    • Adapting to different countries’ legal and technical requirements, including translation of documents and advertisements, and the necessity of market research.

  • Globalization Issues:

    • Creation of economic dependency and global imbalances in trade balances.

  • Competition Risk:

    • Domestic firms may be outcompeted by international competitors.

SPECIALISATION

Definition and Benefits:

  • Specialisation allows countries to focus on producing goods and services they are most efficient at making.

  • It leads to efficiency gains that can reduce consumer prices and improve global resource utilisation, raising worldwide living standards.

DISADVANTAGES OF SPECIALISATION

  • Global Competitiveness:

    • Increased vulnerability to competition from overseas firms.

  • Dependency Risks:

    • Over-reliance on a few industries may pose threats to economic stability, such as food security.

ARGUMENTS FOR FREE TRADE

  • Free Trade Defined: Countries can import and export goods without tariffs or non-tariff barriers, promoting:

    • Lower consumer prices.

    • Increased export volumes.

    • Achieving economies of scale.

    • A greater variety of choices for consumers, boosting economic growth.

    • Enhanced competition driving firms towards efficiency.

  • Examples:

    • Benefits observed in economies like Qatar and Japan.

ARGUMENTS AGAINST FREE TRADE

  • Infant and Senile Industry Arguments: Protection is needed for emerging and declining sectors.

  • Government Revenue: Trade restrictions can be a source of state revenue.

  • Balance of Payments: Restrictions may help manage a nation's balance of payments.

  • Anti-Dumping Measures: Protecting against below-cost selling by foreign firms.

  • Environmental Concerns: Trade rules should consider environmental impacts.

INTERNATIONAL TRADE POLICIES/BARRIERS

  • Tariffs: Taxes on imports that raise the price of foreign goods, making domestic products more competitive.

  • Non-Tariff Barriers: Regulations that complicate trade, limiting the volume of imports.

  • Quotas: Limits on the quantity of specific imports allowed.

  • Voluntary Export Restraint (VER): An agreement between exporting and importing countries to limit exports.

  • Subsidies: Domestic government financial support to local industries can enhance competitiveness.

  • Embargoes: Complete bans on trade with specific nations, such as the US embargo on Cuba.

SUMMARY

  • Overall, the advantages of international trade generally outweigh disadvantages for most countries. In the long run, the benefits of free trade often surpass the drawbacks, resulting in both winners and losers in the trade scenarios.

PART 2: ABSOLUTE AND COMPARATIVE ADVANTAGE

DEFINITIONS

  • Absolute Advantage:

    • A country has an absolute advantage when it can produce a product with greater output per unit of resource than any other country.

  • Comparative Advantage:

    • A country possesses comparative advantage if its opportunity cost of producing a good is lower than that of other countries.

ABSOLUTE ADVANTAGE

  • Example with Two Countries (A and B):

    • Output Without Specialization (Table 1.0):

    • Country A: 1000 Crisps, 5000 Chocolates.

    • Country B: 2000 Crisps, 3000 Chocolates.

    • Total Production: 3000 Crisps, 8000 Chocolates.

    • Identifying Advantages:

    • Country A has an absolute advantage in producing Chocolate, while Country B excels in Crisps.

    • Output With Specialization (Table 2.0):

    • Country A’s output rises to 10,000 Chocolates, and Country B yields 4000 Crisps.

    • Total Production: 4000 Crisps, 10,000 Chocolates, indicating that specialization leads to increased total output.

COMPARATIVE ADVANTAGE

  • Opportunity Cost Concept: The production volume sacrificed of one good when producing an additional unit of another.

  • Assuming Two Countries (A & B) produce Wheat and Coffee (Table 3.0):

    • Output Before Specialization: Country A: 3000 Wheat, 3000 Coffee; Country B: 2000 Wheat, 1000 Coffee.

    • Opportunity Costs:

      • Country A: 1 unit of coffee = 1 unit of wheat.

      • Country B: 0.5 units of coffee = 2 units of wheat.

  • Identifying Comparative Advantages:

    • Country A has a comparative advantage in Coffee due to its lower opportunity cost.

    • Country B has a comparative advantage in Wheat for the same reason.

  • Specialisation Impact: Full specialisation raises Coffee production from 4000 to 6000 (total); it reduces Wheat fro m 5000 to 4000, emphasising potential increases in production with resource reallocation and opportunities for trade.

ASSUMPTIONS IN THE MODEL

  • Lack of economies/diseconomies of scale.

  • No transport costs or trade barriers.

  • Perfect knowledge across trades.

  • Mobile factors of production.

  • Ignoring externalities.

SUMMARY OF KEY CONCEPTS

  • Absolute Advantage: Identifies productivity efficiency.

  • Comparative Advantage: Focuses on cost efficiency in trade.

  • Specialization: Refers to efficient resource allocation for output maximization.

THE ADVANTAGES OF TRADE

  • Growth in World Trade:

    • Examine changes in trade values, focusing on trade as a share of GDP.

    • Note recent economic disruptions stemming from COVID-19.

  • *Statistics on Exports Amidst GDP: Data is presented in graphical format to illustrate long-term trends and recent fluctuations across various economies and periods (specific years observed include 1960, 1980, 2000).

MERCHANDISE EXPORTS BY VALUE

  • Trends from 1990 to 2020 detailed in USD billions contrast values from developed and developing economies.

ANNUAL GROWTH IN VALUE OF MERCHANDISE EXPORTS

  • Analytics illustrate specific growth rates in developing and developed economies and the annual fluctuations encountered from 1980 to 2020.

MERCHANDISE TRADE AS % OF GDP

  • Historical data showcasing percentages over decades spanning 1960s to 2010s demonstrates trade activity as a component of GDP for various countries.

  • Summarized data from countries such as the USA, Japan, Canada, Germany, and China illustrates relative strengths.

COMPARATIVE GROWTH IN WORLD MERCHANDISE EXPORTS

  • Historical indices depict volume and value shifts since 1980, complemented by visual data analysis of export trends.

ARGUMENTS FOR RESTRICTING TRADE

  • Methods: Link to tariffs, quotas, and embargoes aimed at regulating trade flow and domestic market protection.

  • Economic and Non-Economic Reasons: Detailed assessment of dynamic arguments backing trade restrictions which span from infant industry protection to addressing environmental impacts.

PREFERENTIAL TRADING

  • Types of Agreements: Description of free trade areas, customs unions, and common markets.

  • Effects of Customs Unions: Understanding trade creation and trade diversion principles in relation to economic arrangements.

  • Long-Term Effects: Analysis of economic benefits and challenges posed by customs unions, noting specifics such as economies of scale and administrative costs.

PREFERENTIAL TRADING IN PRACTICE

  • Examination of real-world entities such as the EU, NAFTA, APEC, ASEAN, and others showcases different degrees of economic partnership among nations.

SUMMARY

  • Conclude with an overview of preferential trading impacts, including detailed discussion on longer-term economic effects and trade negotiations.