Trade Flashcards
(46 cards)
1
Q
define absolute adv
A
when a country can produce more goods or services compared to another country using the same resources= same FOP
= country A is more productive than B due to lower COP
2
Q
is absolute adv valid?
A
- too simplistic? questioned by economist David Ricardo
= absolute adv doesn’t include opportunity cost
= must be factored in to find who is lowest cost producer
= created comp adv
3
Q
define comparative adv
A
- a country should specialise in producing goods and services where they have a lower opportunity cost compared to another country
4
Q
describe specialisation
A
when a business or country focuses its resources on a specific area of production
= firms should divert their resources to producing goods at lowest OC
= would make trade mutually beneficial
5
Q
adv of comparative adv
A
- CA means we get max output
= gains from specialisation as countries divert resources away from inefficient production= max output produced= countries can consume beyond PPF - receive lowest prices= low COP= lowest possible cost for global producers
- resources will be transferred to countries that are the most efficient producers
= max output and satisfy consumer demand= allocative effiency
6
Q
disadv of comparative adv
A
- where does CA come from?
= may just be lucky and have high natural resources= agriculture etc or China’s huge labour force increased their Q of labour
= UK has CA in financial services due to higher skilled sector workers - hard for country to maintain adv
7
Q
reasons for patterns of trade
A
- comp adv= low COP= high AE
- countries are members of trading blocs e.g. EU or NAFTA
= naturally trade w countries within trading bloc due to free-trade benefits compared to countries outside of it who have protections measures - protections barriers block exports and imports= won’t trade if there are high tariffs and quotas
- transport costs
= UK doesn’t trade as much w far away countries like Aus mostly trade w Europe and US= high transport costs discourage trade and make prices uncompetitive compared to closer goods - non-price factors
= may have CA but other countries can offer brand loyalty, marketing and higher quality= may ignore country w CA
8
Q
assumptions of comp adv
A
- no transport costs
- perf info
- no R+D/ innovation
- no EoS
9
Q
benefits of trade and development
A
- exploit CA through specialisation and exporting low cost goods
= attract natural resources in developing countries due to abundance of natural resources like trees and minerals
= can sell to countries who demand them= have power to increase prices
= increase growth due to high AD caused by more exports - consumers benefit from low prices due to large markets which have comp prices= also more choice
- markets grow and increase output= decrease AC and COP= gain Eos benefits= create efficiency gains that can be transferred to profit
= Govs collect corporate tax revenue to promote development - opening markets can import new, modern capital goods= promote technological transfer as countries can copy other recent developments in tech etc
= use them to improve domestic production= AE and lower COP in LR - if firms can make high profits= can re-invest back into business to improve tech= dynamic efficiency gains= able to break away from primary sector dependence and focus on secondary tech-based production
- specialisation due to comparative adv can lead to Eos= higher productivity in global market= increase per capita incomes
10
Q
disadv of trade and development
A
- ‘resource curse’= developing countries rely on exports of primary commodities for their growth and development (Inelastic demand for primary goods meaning any shitfs in suplly can shift prices hugely)
= BUT, future prices of primary goods may fall due to low AD etc= would decrease export revenue= low incomes and profits - primary resources will eventually run out as their finite= once gone, key avenue for growth will be closed= unsustainable way of pursuing development
- primary commodities are suspect able to price fluctuations
= demand and supply for primary goods may be inelastic= few substitutes, takes ages to grow and harvest and seen as necessary= change in market conditions would cause huge price swings= less investment and create uncertainty of export profit and revenue - access to international markets may be limited
= developed countries may impose protectionist measures on exports of primary goods e.g. US subsidised domestic corn in order to decrease domestic COP and decrease prices= make US more competitive than other countries w higher COP - depends on tariff regulation as high regulations would de-incentivise to move away from primary commodities sector dependence
= manufactured goods have higher tariffs than primary goods
= increase costs of producing 2nd sector goods - long term decline in terms of trade as export prices that are relative ti import prices may fall= harder to sustain revenues and growth in LR
= countries become trapped in primary sector= decrease revenue, growth and development
11
Q
policies to protect trade
A
- import substitution industrialisation (ISI)
= tariffs on imported manufactured goods to allow domestic industries to grow and compete w other countries
= own economy can build manufactured sector to move away from primary sector - tariffs on imported goods
12
Q
adv of policies to promote trade
A
- protects domestic jobs
= greater exports = created sustained job creation in those industries
13
Q
disadv of policies to promote trade
A
- in LR it restricts growth= restricting imports of important capital goods, size of markets to trade w= increase costs etc and LR growth
- loss of comp adv= cant compete w rivals overseas as a domestic industry
- fall in import tariff revenues to domestic gov= may lead to higher budget deficit
14
Q
define trade liberalisation
A
the process of reducing or removing barriers to international trade, such as tariffs, quotas, and regulations
15
Q
adv of trade liberalisation
A
- gain in AE= trade increases competition by decreasing barriers to entry
= makes markets more contestable and competitive= create prices lower and closer to MC - trade encourages producers to benefit from EoS
= competing globally= encouraged to achieve EoS through specialisation, investment etc= productive effiency gains - lower tariffs etc allow more comp markets= more supernormal profit motive= more RandD
- trade deals could lead to inward FDI between 2 countries
16
Q
factors that affect likeliness of trade deals
A
- gravity theory of trade= countries tend to trade most with nations in close proximity
- size of overseas trade e.g. Aus is a small % of UK overseas trade (0.7% of imports)
- some products may already be tariff free
17
Q
define protectionism
A
any attempt by a country to impose restrictions on trade in goods and services
18
Q
types of protectionism
A
- tariff
= type of tax or duty that raises the price of imported products, causing domestic demand for good to fall
= cause expansion in domestic supply - domestic subsidies
= gov help or state aid for domestic firms facing financial problems= lower COP and more comp against imports - import quotas
= set limits on the Q of a foreign produced goods that sold on the domestic market
= sets physical limit on a specific good imported by restriciting supply of an imported product by cutting supply to increase price of import
19
Q
chain of analysis for adv import tariff of US on Mexico
A
- used to protect domestic industries in US and reduce trade deficit (country is importing more goods and services than it is exporting)
- increases the price of imported Mexican goods like cars to P+tariff
= de-incentivise consumption of imports, encourage consumption of domestic goods as they’re more price competitive and typically lower - will cause expenditure switching effects
= relative prices of US output will fall= lead to expansion of US output
= higher jobs in US as producers become more comp
= increase US RGDP and help close US large trade deficit - import tariff would discourage US firms like Ford from moving production to Mexico
= keep more jobs in US especially in “rust belt” states where real incomes have been falling due to increased long term structural unemployment
= if there is higher demand for US employment= higher SOL and tax revenues for gov
= lower US fiscal deficit as they will be making more money
= in LR, will worsen their gov debt= easier to pay back - higher tariffs on Mexican exports would help increase investment spending in US= will increase their trend of economic growth rate
= tariff would increase profitability of producing in US= may cause accelerator effect on capital investment= cause outward AD shift and LRAS shift
= increase economic growth in US economy - allow infant domestic supply to grow and gain EoS as the domestic supply increases from Q1-Q3
- increase price of imports coming in= can prevent dumping of goods @extremly low price= would make them less comp
- protect against losses of domestic employment as the domestic supply increases= need more workers to produce higher output
- protect against artificial low costs abroad like low paid labour
= higher import prices offset any cost advs abroad - increase in gov revenue from each imported unit with tariff cost
- improve CA position by decreasing import expenditure
20
Q
chain of analysis for disadv import tariff of US on Mexico
A
- 40% of parts in Mexican production process are imported from US
= US component suppliers will be harmed due to lower demand from Mexican firms
= decreased exports= won’t be able to trade deficit as US exporters will be hurt too - SOL in US may be harmed by tariffs
= higher prices of Mexican avocados etc would mean US consumers have lower disposable income to spend elsewhere= create a negative income effect= consumers may end up bearing the cost of tax - a tariff would risk retaliation that could harm US exporters due to game theory
= reactionary tariffs from Mexico could lead to trade war
= worsen US economy - depends on LR vs SR effect
= in LR, consumers make the most loss= loss of welfare gains
= may be regressive on low income earners= worsen inequality
21
Q
main EVAL for protectionism
A
- market distortion of increasing prices
= causes a DWL of consumer surplus due to higher price and loss of consumer choice
= used to consume @Q2 from imports and domestic= high comp= high choice to buy from abroad of home= now only choice @Q4 as quantity in market is falling
= lower consumer satisfaction and happiness - policy can worsen allocation of resources
= shown by left hand side DWL of work efficiency gains
= domestic producers need higher price to produce @Q5 as they’re less efficient compared to countries with comparative adv
= less efficient use of resources, should be used from producers abroad who will use them more efficiently
= worsens world allocation of resources - tariff on imports has high risk of stronger retaliation from nation of tariff imposed on
= makes costs for exporters higher= decrease growth of domestic country
= cost of retaliation would be higher than benefits of tariff imposition - tariffs are regressive
= higher burden on low income consumers
= tariffs usually placed on necessity goods that the poor need e.g. fruit and veg etc= harms ppl on low incomes far more than those with high incomes
= worsen issue of equity - depends on size of tariff= the impact it has on market
- depends on elasticity of demand and supply in market
= if demand for imports is inelastic due to comp adv, weather, lack of substitutes for raw materials etc, a contraction of demand for imports won’t be very large
= ineffective tariff - protects economy from foreign influence and potential dominance of MNCs
= producing own economy for growth and development
= own industries can be relied on for growth
= decrease potential influence of MNCs over policy making on conditions in domestic economy
- protects economy from foreign influence and potential dominance of MNCs
22
Q
Analyse impact of tariffs on price, surplus, efficiency
A
- assume world suppliers have the comparative advantage
= able to produce @supply world
= supply curve is perfectly elastic (horizontal) as the global market is so large compared to any individual country’s market that the domestic supply of any particular good or service is unlikely to influence the global price - tariff raises the cost of importing goods= domestic price of the good increases
23
Q
analyse tariff diagram in detail
A
- assume world suppliers have the comparative advantage
= able to produce @supply world
= supply curve is perfectly elastic (horizontal) as the global market is so large compared to any individual country’s market that the domestic supply of any particular good or service is unlikely to influence the global price - domestic supply is @Q1 and domestic demand is @Q2
= creates excess supply for goods and services in UK
= cant increase price to ration demand as P world inelastic= won’t change
= rest of demand must be imported= trade deficit risk - tariff on world supplies shift Sworld upwards
= vertical distance between SWorld and SWorld +tariff is the value of the tariff
= increases price in the market - causes domestic supply to extend from Q1-Q3
- causes domestic demand to contract from Q2-Q4=Q-2.00 higher price means consumers less willing and able to buy products now
- decreases excess demand to Q3-Q4= decrease imports
- gov makes tariff revenue as tariff is charged on every imported unit
- causes DWL of consumer surplus
- causes DWL in world efficiency= domestic supply producing extra units from Q1-Q3, there is loss of efficiency as they were previously supplied by efficient world suppliers that had comparative adv in production
= now domestic suppliers has artificial price adv so they produce more of these extra units @ lower efficiency
= costs domestic suppliers more to produce each extra unit from Q1-Q3
= resources are being provided to inefficient producers when they should’ve been going to world suppliers to be produced
24
Q
What are the advantages of monetary union? (same currency)
A
1) Currency risk - Euro for instance is more stable making it cheaper for smaller countries to borrow
2) Trade benefits - enhances welfare gains from being in a single market e.g encourages more cross border trade
3) Investment - stimulate inward investment in industries such as tourism
4) Competition - euro would increase price transparency help consumers find products at better prices
5) Transactions - shared currency cuts the costly conversion of money and might also improve the mobility if labour (can be paid in right currency and maybe even better recognise foreign qualifications plus freedom of movement)
- part of non fluctuating exchange rate
= good for smaller nations who have weak and volatile ER
= euro is more stable= higher confidence for foreign investors as it will hold its value
= higher business confidence= higher investment
= more economic stability and international trade
25
What is the criteria of converging to a monetary union?
1) Stable prices - inflation must be similar for all countries
2) Stable exchange rate - national currency must have been stable to other EU currencies for a period before
3) Sound government finances - government debt cant exceed more than 60% of GDP
4) Interest rate convergence - the interest rates must be similar
26
Consequences of monetary union?
1) loss of monetary policy autonomy as its given to one monetary central bank
= lose control of monetary policies so that if state has diff economic state than other members there's no guarantee MP will be suitable for individual nation
2) No potential for countries to alter their exchange rates in order to boost trade performance
= if state needs to increase export based growth they would artificially depreciate the currency but cant in eurozone due to single currency
= cant rely on change in value of currency
3) Cost of currency conversion very high
= adopting new currency is expensive process
= physical cost of printing money, taking away old notes and coins etc
4) lack of fiscal union
= unstable states like Greece mishandle fiscal spending so that wo any fiscal union controls, they play major risk on monetary union members
= forced to adopt strict austerity measures due to reckless spending
= acts as burden on other members due to high debt created by bailing out Greece
= risk de stabilisation of entire trade bloc
27
Benefits of Eurozone?
1) Non fluctuating exchange rate
= adopt a stable currency that holds value
= means that foreign investor will have much more confidence in investment in order to reflect their purchasing power parity
= more chance for stability, business confidence and greater international trade as its easier to export and import with other nations if they can trust currency to hold it's value
2) lower costs from currency conversions
= consumers have more money to spend on European goods and services
= more tourism and greater mobility of labour leading to greater growth and trade= more inward investment
3) Increased business confidence
= stable currency firms more likely to invest in capital/ inward FDI
4) Currency more stable against speculation
5) Prices between countries easier to compare= encourages more cross border trade
28
describe customs union
Group of countries that agree to:
- cut tariffs and quotas between member nations to encourage free trade movement of goods and services
- adopt a common external tariff on imports from non-member countries
29
effects of UK leaving EU customs union
- changes patterns of trade as trade will increase between UK and non members like china
= able to make free trade deals with higher amount of non member countries who may be fast emerging economies
=
-
30
adv joining customs union
- increased trade between member countries due to the removal of tariffs
e.g. EU don't charge any tariffs
= encourage higher levels of trade between members
= by eliminating tariffs, the cost of imports from member countries falls, making them relatively cheaper than non-member imports
= encourages firms and consumers to buy more from within the union, increasing trade flows
= can lead to trade creation, where more efficient producers within the union replace less efficient domestic producers, improving overall allocative efficiency
= potentially increasing GDP= allows firms to benefit from EoS by accessing a larger market without facing trade barriers
- reduction in non-tariff barriers (NTBs) through harmonised standards and regulations across member states
= countries follow common rules on product safety, labelling, and technical standards, making cross-border trade simpler and more predictable for firms
= regulatory alignment lowers costs for exporters who no longer need to adapt their products to multiple sets of national standards
= reduces the need for customs checks, inspections, and compliance procedures
= saves time and administrative costs
= boost business confidence and encourage investment from multinational firms looking to operate across the union
= improve allocative efficiency as consumers gain access to a wider range of goods that meet shared standards
= encourage competition and innovation
31
EVAL of customs union
- benefits depend on the competitiveness of domestic firms
= if domestic industries are uncompetitive they may struggle with increased competition from more efficient producers within the union
- common external tariffs restrict a member's ability to negotiate independent trade deal
= may limit access to cheaper goods from outside the union
= trade diversion could occur= reducing overall global efficiency
- common regulations can limit national sovereignty
= member countries may be forced to adopt standards that don't suit their own economic or social preferences
= smaller firms may still struggle with the bureaucracy involved, especially if regulations are complex or costly to comply with
= the actual benefit depends on the country’s size, export capacity, and its previous exposure to non-tariff barriers
- depends on the degree of alignment and how business-friendly the shared regulations are
= industries may find the standards burdening, particularly if they are more tailored to larger or more developed economies
- countries lose some control over setting their own rules, which may be politically sensitive or economically restrictive for some sectors
32
chain of analysis for import quota diagram
- sets physical limit on specific imported goods
= Q3 can only import unto quota so imports are capped @Q1-Q3
= leaves excess demand putting pressure to increase prices
= this incentivises increased domestic supply up to Q4
= protects domestic employment and firms
33
describe export subsidies
- form of gov int to encourage goods to be exported rather than sold on domestic market
= gov may use direct payments, tax relief provide cheap access to credit
34
EVAL of export subsidy
- not enough to change world price but still gives domestic suppliers higher price and causes extension of domestic supply
- loss of DWL efficiency as domestic suppliers require higher prices as cost is increased due to less efficient production vs other countries w comparative adv
= allocative inefficiency
35
adv of free trade
- more efficiency in world market which improves allocation of world resources= higher incentive for firms to specialise and produce goods where they have cost adv
= countries can import goods that they cant efficiently produce themselves
= solves basic economic problem= comp adv
- countries get access to goods and services that they wouldn't be able to produce domestically in own economy
= wo free trade UK wouldn't be able to access bananas etc= cant satisfy domestic demand wo imports
- more raw materials for producers to access and use for production
= more choice
- consumers benefit from lower prices to increase consumer surplus
= international comp decrease price= more efficiency and low COP
= lead to EoS benefits as firms supply much larger market size
= output will be so large that gains from EoS will be high
= lead to lower LRAC
- improve CA position by making gains from economic growth due h=to higher AD
36
define trade creation
when a country enters a free trade area where barriers to trade are low between members but an external tariff is placed on non member countries
= movement from a high cost domestic source of output to a low cost domestic producer and source of supply inside a customs union
= the advs are the same advs of free trade
37
describe single European market
common market that encompasses all EU member states allowing free market movement of goods, services, people and capital within EU
- facilitates cross border trade and investment to lead to higher comp, lower prices and more choice for consumers and producers
- wallowers higher mobility of labour= less unemployment
38
describe trade diversion
- when country joins customs union, movement from low cost foreign producer to high cost producer within CU
= from efficient producer to non efficient producer
- when UK joins EU they enforce tariff on most efficient producer of china
= shift up Chinese supply curve to china supply+tariff= increase their price
= allows EU producers other enter market and become more comp purely due to CET on Chinese imports
- causes UK supply to extend but UK demand contracts
= domestic demand now satisfied by EU imports
- causes Chinese economy to suffer due to low trade and exports with UK as all trade now happens with EU
- causes DWL of consumer surplus along demand curve as price increases
- causes loss of domestic efficiency along supply curve as UK increase QS @ higher cost than if china supplied it
- loss of EU efficiency is distance between Q3, Q4
39
define monetary union
when nations join together to form a trading bloc where they agree to trade freely between themselves w a common currency
= allow free and easy movement of goods and capital
40
disadv free trade
- over specialisation causes country to be reliant on output of a narrow sector
= don't get balanced growth so may risk demand or supply side shock that would change revenue
= hard to get high growth wo diversification of industry
= cause inequality as ppl that don't work in sector w comp adv don't get high income like there who do
- may become over-reliant on imports
= conflicts of international relationships etc may constrain supply of key imports
- unfair trade practices like Govs heavily subsidising production
= create excess supply that may be dumped abroad @ price below COP
= decimates foreign industry
- high risk of unemployment
= industries wo comp adv die away when country opens up to free trade
= contraction of supply to Q2= shut down domestic industry
= high structural unemployment= low SOL and gov finances
- no regulations in free trade
= low quality and standards of goods traded
- environmental trade offs
= motive to max output causes high air pollution, resource depletion etc
41
adv of regional trade agreements
- high trading blocs increases trade creation between members
= lower prices for consumers as tariffs are removed
- low transaction costs as no barriers to trade and no border controls
= cheaper and easier to trade
- high potential for market to trade w
= take advantage of of EoS by specialising a comp adv
= large gains from efficiency due to tech advancements etc
- firms operate in comp market
= more efficiency and better allocation of resources as results of EU cap
- conflicts between blocs may lead to protectionism rise
42
describe import quota
quantity limit placed on number of imports coming into a country
43
describe import quota diagram
- quota limits the amount of imports @Q3 which causes an excess demand
= because imports now cant fill the excess demand between Q1-Q2
- to ration excess demand, domestic firms must increase price level
= incentivises more domestic supply @ Q4
- high prices cause DWL of consumer surplus= fall in real disposable incomes of consumers
- causes reduction in choice for consumers= reduces economic welfare
- domestic supply causes a DWL of efficiency as domestic suppliers have higher COP etc compared to countries with comp adv
44
disadv import quota
- DWL of consumer surplus due to higher prices
- unlike tariff it doesn't produce direct tax revenue for gov
- less choice for consumers= decrease economic welfare
- strict import quotas create high enforcement and regulation costs including border delays which increase further trade frictions
45
UK should join EU
- CU allows free trade between members and a common external tariff on imports from non member countries
= staying inside helps to facilitate trade as the EU is the UK's biggest trading partner due to lots of cross border trade e.g. component parts of cars, construction etc
- inside CU, UK exports wouldn't be subject to rules of origin checks and regulations which are very time consuming= makes it less costly for TNCs to invest and produce in the UK
= trade friction costs outside CU lead to lower real incomes and higher consumer prices
- leaving EU would result in import tariff on UK exports= higher tariffs damage consumer welfare and regressive effect on income distribution
= lead to higher cost push inflation= central bank may respond to that by increasing IRs
- gravity theory suggests that we trade w countries in close proximity to us and its unlikely to change in future years
46
UK shouldn't join EU
- trade within CU, can't negotiate trade deals with countries outside EU
= staying outside EU would allow UK to negotiate preferential free trade agreements with faster growing economies like India and china
- staying in EU means that UK would be obliged to follow changes in EU trade agreements wo any say in how they were negotiated
- strength of UK and EU agreement would lead to free trade agreement despite Brexit= mitigate negative effects of leaving CU
