INTERNATIONAL TRADE AND PROTECTIONISM Flashcards
Define Comparative Advantage
When one country can produce a good at a lower opportunity cost than another.
Define Absolute Advantage
When a country can produce more of a good with the same amount of input than another
Law of Comparative Advantage
States that firms should specialise in the production of goods in which they have CA and trade with one another
Opportunity Cost Formula
Sacrifice / Gain
Assumptions of Theory of CA
- AC of production is constant
- No trade barriers
- No transport costs
Limitations of Theory of CA
- Increased specialisation may result in (de/in)creased AC due to (dis)economies of scale
- Countries may have trade barriers in place such as tariffs which reduce the benefit of CA
- Cost of transport reduces benefit of CA
- Not 100% of labour in country will be suited to production of chosen good
- ER and Inflation Rate ignored
Specialisation
When one individual, region or country concentrates on the production of a narrow range of goods and services
Advantages of International Trade/Specialisation
- Increased World Output which will lead to increased World GDP, World Living Standards
- Potentially lower prices due to economies of scale decreasing AC of firms
- Greater variety of goods/services
Disadvantages of International Trade/Specialisation
- Expected benefits are distorted in real world due to limitations of the Theory of CA (Eval.)
- May lead to over-dependance on Imports and Exports for both availability of imported goods and revenue from exporting goods (E.g. Saudi); leaving countries liable to economic shocks
- Non-diversified economies are liable to changes in demand patterns/trends in economy
- Domestic industries in newly imported sectors will suffer; could cause structural unemployment
What is Protectionism?
The implementation of policies to protect an economy through restrictions on imports
Examples of Protectionist Policies (3 Main Ones)
- Tariffs - A tax placed on imports
- Quotas - A physical limit placed on the quantity of imports
- Export Subsidies - Subsidies to domestic firms to decrease Cost of
Production and make exports more internationally competitive
Red Tape - Regulation put in place to make it harder to import into a country (e.g. excessive checks at border control)
Embargoes - A complete ban on certain goods
Arguments FOR Protectionism
- Infant Industry Argument
- Anti Dumping
- Protection of Domestic Jobs and Revenue
Infant Industry Argument + Eval
Newly established industries cant yet compete with established foreign firms due to lack of EOS and growth; justifying protection until a time where they are able to compete.
Eval. - Decreased incentive for domestic firms to be as efficient as possible as they know they know they’re protected
Anti-Dumping + Eval.
Foreign low-cost producers with excess supply may ‘dump’ excess supply in other countries below Cost of Production in that country to make money; protection can stop this from taking place
Eval. - Hard to prove someone is dumping and can have harsh retaliation if its not the case
Protection of Domestic Jobs and Revenue + Eval.
- Protection can keep domestic workers in jobs and firms in business. This will decrease structural unemployment and will allow firms and workers to continue paying their respective taxes and raise tax revenue to correct a budget deficit. Eval. - Firms may be inefficient so may be longing out process of firms closing as they couldn’t compete anyway
- Tariffs themselves will create revenue also
