International Trade And Access To Markets

Question 1

Outline 6 advantages of international trade

Answer 1

1) Comparative advantage:
A country specialises in producing only those goods that can be produced efficiently and at the lowest opportunity cost

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2) Economies of scale-
producing a narrower range of goods and services means that a country can produce in higher volumes and at a cheaper cost per item/unit.

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3) Purchasing power -
increasing trade results in increased competition that lowers prices and allows consumers to be able to buy more for their money.

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4) Fewer domestic monopolies - domestic prices may be kept high when a single firm controls a large proportion of the domestic market (25% or greater), as there is less competition. Imports from overseas competitors help to lessen this effect.

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5) Transfer of technology - application of new technologies is incentivised as this may lead to design improvements and cost savings as well as supporting innovation and enterprise

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6) Increased employment - increased production for export is likely to result in increased employment. In turn, as a result of the multiplier effect, more jobs will be created across the whole
economy.

Question 2

Outline 6 disadvantages of international trade

Answer 2

1) Over-specialisation -
If demand falls or if the same goods can be produced more cheaply overseas, then production needs to shift to other products. Specialised production centres tend to be less flexible and less able to diversify

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2) ‘Product dumping’ -
profit lines can be dangerously tight, even to the point where goods are sold at a potential loss. Dumping refers to exporting at a price that is lower in the foreign market than the price charged domestically.

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3) Stunted growth or decline of local and emerging industries -
new home-grown industries may find it difficult to grow and become established when faced with existing foreign competition, where costs are lower.

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4) Protectionism and tariffs -
a country/government may protect important domestic industries by imposing additional taxes and tariffs on imported goods and/ or encouraging exports.

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5) De-skilling -
traditional skills and crafts may be lost when production technology replaces manpower. So-called ‘screwdriver jobs’ may dominate.

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6) Exploitive and labour-intensive industries -
the biggest cost for most industries is labour; this is particularly true for consumer manufacturing industries. By squeezing this cost, even if working conditions are compromised, profits can be maximised.