Flashcards in 3.1 International Trade Deck (62):
What is free trade?
Occurs when nations can exchange goods and services without any trade barriers.
What is international trade?
The exchange of goods and services beyond national border it involves the sale fo exports and imports.
What are exports?
Goods and service sold to overseas buyers.
What are imports?
Foreign goods and services brought by domestic households and firms.
Why do countries need to trade?
Because scarce resources are unevenly distributed between counties.
Why do economists argue that free international trade is a good thing?
That the benefits excess the costs, not everyone gains or gains equally but the net benefits to society are positive.
What are some benefits of international trade?
Lower prices for consumers
Greater choice for consumer
The ability of producer to benefit from economics of scale
The ability to acquire needed resources
A more efficient allocation of resources
A source of foreign exchange
Increase market size
Improved international relations
Why is lower prices for consumers a benefit of international trade?
Free trade reduces the cost of trading meaning consumers are better off.
Why is greater choice for consumers a benefit of international trade?
Free trade enables consumers and firms to access a larger variety of goods and services from different producers around the world.
Why is the ability for producers to benefit from economies of scale a benefit of international trade?
By operating on a larger scale in international markets free trade enables firms to benefit from economies of scale ie. costs savings that can be passed onto consumers in the form of lower prices.
Why is the ability to acquire needed resources a benefit of international trade?
Through trade countries can access nature resources and capital goods that are not available domestically to further their production.
Why is a more efficient allocation of resources a benefit of international trade?
Free trade benefits the economy as it ezncroages an efficient allocation of the world scarce resources. free trade forces domestic firms to focus on improving the quality of their output due to foreign competition.
Why is increased competition a benefit of international trade?
Trade ensures that domestic firms become exposed to competition from foreign firms. Hence domestic firms are forced to come more proficient ie. to produce goods and services at the lowest possible cost.
Why is a source of foreign exchange a benefit of international trade?
When countries sell exports firms and governments acquire foreign exchange. This enables them to make payments to other countries for the purchase of foreign goods and services.
Why is increase market size a benefit of international trade?
International trade enables firms to earn more revenues and profits.
Why is improved international relations a benefit of international trade?
The absence of trade barriers encourages international trade and cooperation between countries. By contrasts if a country uses trade barriers then other countries are likely to retaliated by doing the same.
What is comparative advantage?
Exists when a country can produce a given amount of output at a lower opportunity cost than another country ie. it gives up less resources than other countries in producing a certain good or service.
What is the theory of comparative?
Countries should specialise in goods and service when they have a comparative advantage, ie. the theory suggests that countries should produce and trade products in which they have a comparatively low opportunity cost even if the trading partner has an absolute advantage in the output of both products.
What are the sources of comparative advantage?
Levels of technology - workers with access to the latest technology will be much more productive than those using outdated technology.
Investment in research and development - this can give countries a comparative advantage in terms of innovations and inventions. Research and development expenditure can also generate new work processes that reduce the relative costs of production.
Inflation - This can damage the comparative cost advantages of a country as higher prices means that forge in buyers are less willing and able to purchase the exports of domestic firms.
Exchange rate fluctuations - these can affect the relative prices of exports and imports. A long term unfavourable change in the exchange rate can cause a reduction in demand from domestic and overseas customers.
What is the world trade organisation?
An organisation to promote trade liberalisation to oversee multilateral trade agreements and to resolve trade disputes between member states.
What are the objectives of the WTO?
To encourage free international trade. member states are bolded to reduce and remove artificial trade barriers such as subsidies which reduce production costs for domestic firms.
To remove discriminatory treatment in trade relations between member nations except for those in trading blocs that have their own set of agreed rules.
To help provide trade opportunities for economically developing countries in order to enhance their growth and development prospects.
What are the six functions of the WTO?
Administering WTO trade agreements - The Two provides a forum for embers to negotiate trade rules and agreements which become binding contracts for governments to keep their trade policies within agree parameters.
Forum for trade negotiations - Members of the WTO are involved in round of negotiations.
Handling trade disputes - The WTO acts as an arbitrator in trade disputes between member states. It acts to settle such disputes in a quick and objective manner.
Monitoring national trade policies - The WTO regularly monitor the national trade policies of its member states through its trade policy review mechanism. This serves to encourage accountability and transparency on trade policies on a multilateral level.
Technical assistance and training for economically developing countries - Trade related technical support and training are provided to help low income countries to better understand WTO obligations and agreements and thus build their capacity to trade.
Cooperation with other international organisation - The WTO collaborates with other organisations to promote economic cooperation and growth such as the world bank.
What is trade protection?
The use of barriers to trade to safeguard a country from excessive international trade and foreign competition.
What are barriers to trade?
Obstacle to free trade imposed by a government to safeguard national interests by reducing the competitiveness of foreign firms.
What are tariffs?
Import taxes, tariffs raise the cost of production to imports thus raising the price of foreign goods in the domestic market and thereby lowering the amount of imported products. A tariff increases costs of production thus shifting the supply curve up forcing the price upwards.
What are the effects of tariffs on domestic producers?
Tend to gain as they receive a higher price and sell a larger quantity, the higher price also means that producer surplus increases.
What are the effects of tariffs on foreign producers?
Lose out as the tariff reduces their price competitiveness and they are only able to sell a reduced amount.
What are the effects of tariffs on consumers?
They lose out as they have to pay a higher price there is a loss in consumer surplus.
What are the effects of tariffs on the government?
Gain since they help to raise government revenue.
What are the effects of tariffs on society?
Lose out since there is a welfare loss.
What are quotas?
Quantitative limites on the sole of a foreign good into a country - limits the quantity imported and so causes an increase int he market price of the foreign good.
What are the effects of quotas on domestic producers?
Gain since it enables domestic firms to supply more to the market they are also able to charge a higher price raising their revenue which can have a positive impact on domestic jobs.
What are the effects of quotas on foreign producers?
Lose out since imports are reduced so revenue falls.
What are the effects of quotas on consumers?
Lose as they are charged a higher price they are only able to buy a lesser amount of the good also.
What are the effects of quotas on the government?
There is no direct impact not he government since the quota does not generate any tax revenue.
What are the effects of quotas on society?
Reduced consumption resulting from the quota shifts production away from more efficient imported products towards less efficient domestically produced goods. This misallocation of resources results in a net welfare loss.
What are subsidies?
A form of financial assistance to local firms to help them compete against foreign imports by lowering the costs of production this helps to protect local jobs.
What are production subsidies?
Help to reduce the production costs for domestic firms.
What are export subsidies?
Less wide ranging as they are targeted at protecting specific export orientated firms.
What are the effects of subsidies on domestic producers?
Gain as they are able to supply more.
What are the effects of subsidies on foreign producers?
Lose as it reduces the amount of exports.
What are the effects of subsidies on consumers?
Not affected as the price remains at the world price, consumers buy more domestic goods so either they gain or lose depends on the relative quality of the foreign goods.
What are the effects of subsidies on the government?
Negative impact on the governments budget due to the expenditure on production subsidies. Taxpayers are also worse odd as there is an opportunity cost of using this money for subsidies.
What are administrative barriers?
Bureaucratic rules and regulations that countries use as a form of protection. Complying with these administrative barriers increase the costs for foreign firms.
What are embargoes?
Bans on trade with a certain country often due to political and economic disputes although they can be used for health and safety reasons. An embargo rarely benefits local consumers who suffer form a lack of choice and higher prices due to the lack of supply.
What are exchange controls?
Restrictions on the quantity of foreign exchange that can be brought or sold by domestic residents thus limiting the amount of foreign exchange available to importerss.
What are arguments for trade protection?
Protect domestic jobs
Safeguard infant industries
Maintain health, safety and environmental standards
Overcoming balance of payments deficit
Source of government revenue.
How does protectionism protect domestic jobs?
Fierce competition form foreign rivals can force domestic firms out of business if there is no trade protection.
How does protectionism protect national security?
It safeguards the country from being too reliant on certain imports from other countries. Protection is vital during times of political conflict and war.
How does protectionism protect infant industries?
Subsidies help to reduce costs of production, quotas help to limit the degree of rivalry and tariffs help domestic sunrise industries to gain a price advantage.
How does protectionism protect health, safety and environmental standards?
Governments may set minimum health, safety and environmental standards for imported products such as medicines and food products to protect its citizens.
How does protectionism prevent dumping and other forms of unfair competition?
Dumping occurs when foreign firms sell their products in large quantities at prices deliberately below those charges by domestic firms often below the cost value. The impacts of anti dumping protection include higher domestic consumption caused by lower expenditure on imports, higher sales and profits for domestic firms and improvement in the balance of payments on the current account for the protected country.
How does protectionism overcome a balance of payment deficit?
If a country's expenditure on imports emcees the revenue earned from its exports protectionism measures can be used to rectify their imbalance.
How does protectionism raise government revenue?
Tariffs help to raise tax revenue for the government.
What are arguments against trade protection?
Misallocation of resources
Danger of retaliation and trade wars
Potential for corruption
Increase costs of production due to lack of consumption
Higher prices for domestic consumers
Increase costs of imported factors of production
Reduced export competitiveness
Why does protectionism cause a misallocation of resources?
Government intervention can distort market signals and so lead to a global misallocation of resources protected firms can become too reliant on the government and thus become inefficient.
Why does protectionism cause a danger of retaliation and trade wars?
Other countries are likely to react by retaliating and imposing their own trade barriers. Such actions can cause trade wars and trade disputes which ultimately hinder global economic growth and prosperity.
Why does protectionism cause a potential for corruption?
Trade restrictions can create opportunities for bribed and illegal smuggling of goods into a country.
Why does protectionism cause increased costs of production due to lack of competition?
Protection can create a lack of incentives for domestic firms and industries to control their costs of production.
Why does protectionism cause higher prices for domestic consumers?
Protectionist measures can that domestic consumers might not be able to purchase lower priced imports with could be of higher quality than those produced domestically.
Why does protectionism cause increased costs of imported factors of production?
Due to trade protection domestic producers might need to pay higher prices for vital imported raw materials and components. This could lead to imported inflation thus leasing to higher domestic prices.