4.1.3 Patterns Of Trade

Question 1

4.1.3a
Define Pattern of Trade

Answer 1

The
- direction
- composition
- volume
Of international trade between countries / regions over time

Question 2

4.1.3a
Factors Influencing Patterns of Trade

Answer 2

• comparative advantage
• emerging economies
• trading blocs / bilateral trade agreements
• Changes in relative exchange rates

Question 3

4.1.3a
Comparative advantage

Answer 3

• A country has a comparative advantage in a good = it can produce it at a lower opportunity cost → this leads countries to specialise in goods where they are relatively more efficient → trade flows increase for those goods.
• Over time → comparative advantage can shift due to tech change, R&D, or education → this changes global trade patterns as countries start exporting different goods (e.g. UK shifting from textiles to services like fintech)

Question 4

4.1.3a
Emerging Economies

Answer 4

• Emerging economies (e.g. China, India, Vietnam) have low labour costs + rapid industrialisation → they specialise in manufacturing and export large volumes of low-cost goods → this reshapes trade flows.
• These countries also import more as their middle class grows → ↑ demand for raw materials, luxury goods, tech → trade flows increase between developed and emerging economies.
• ↑ competition for developed countries’ firms → forces them to innovate or shift to high-value sectors → further altering trade pattern

Question 5

4.1.3a
Trading Blocs / Bilateral Trade Agreements

Answer 5

• Trading blocs (e.g. EU, ASEAN, Mercosur) remove trade barriers between member countries → leads to trade creation within the bloc → ↑ intra-bloc trade flows.
• However, they may impose external tariffs → leads to trade diversion = trade shifts away from more efficient non-members → distorts global trade patterns.
• Bilateral trade agreements (e.g. UK-Australia FTA) → reduce tariffs and boost trade between two countries → can reroute trade flows and build closer ties between specific partners.

Question 6

4.1.3a
Relative Exchange Rates

Answer 6

• If a country’s currency depreciates (e.g. £ falls against $) → exports become cheaper for foreigners + imports become more expensive → ↑ demand for exports + ↓ demand for imports → net trade improves.
• This shifts trade flows toward countries with weaker currencies and away from those with strong currencies.
• BUT: depends on the price elasticity of demand for exports and imports (Marshall-Lerner condition) + time lags in adjustmen

Question 7

4.1.3a
Marshall Lerner Condition

Answer 7

Depreciation of a currency will improve a country’s current account deficit IF the PED of exports + imports > 1

Question 8

4.1.3a
Marshall Lerner Condition COR

Answer 8

currency depreciation = cheaper exports + expensive imports

• PEDx + PEDm > 1 = elastic = QD responds strongly to price changes = ↑ exports + ↓ imports
  = improvement in the current account → more foreign currency earned + less spent.
• PEDx + PEDm < 1 = inelastic = total spending on imports rise (due to higher prices), export revenues may fall = current account may worsen.

Question 9

4.1.3a
J-curve

Answer 9

Shows Marshall-Lerner Condition