Theme 4.1.3 Flashcards
Patterns of Trade
Historically trade has always been conducted according to the concept of comparative advantage. E.g. If developing economies can produce primary goods at a lower domestic opportunity cost than other countries then it would make sense for them to concentrate their efforts in that sector and for developed economies to concentrate their efforts in the production of goods and services in which they enjoy a comparative advantage. That way, world production of all goods and services will be maximised.
In more recent times due to the growth of trading blocs such as the European Union and bilateral trading agreements the pattern of trade has changed. It is now more likely for a
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country within the trading bloc to trade with other countries within that same trading bloc due to the absence of tariff and non-tariff barriers between countries. So for example countries within the EU are more likely to import lamb from France - which has a
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comparative advantage within the EU than to import lamb from New Zealand who may have a comparative advantage overall within the context of the global economy; but is not a member of the EU and whose imports are therefore subject to tariffs and quotas which raise the price of NZ produced lamb above that of France.
Ltrade diversion diagram
Changes in relative exchange rates will also impact on the pattern of trade. If for example the value of the pound was to fall (depreciate) against other world currencies, then this would make our exports more competitive and would enable UK producers to sell more easily in foreign markets. Conversely a depreciation of the pound would make foreign imports more expensive which would encourage UK consumers to switch towards domestically produced goods and services.
An appreciation in the value of the pound would mean the price of UK exports would rise and demand would fall. How much exports would fall by would be influenced by the size of the appreciation and the elasticity of demand for exports. Similarly an appreciation would cause the price of imports to fall and demand to increase
