2008 h2 international trade lecture 1
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International Trade
Balance of Payments
Exchange Rate
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International Trade: Gains
Disadvantages
Pattern of Trade: Principle of Comparative Adv
Terms of Trade - meaning; Changes & Effects
Barriers to Trade: Types
Arguments for & against
Preferential Trading Agreement
Globalisation
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International tradeInternational trade
exchange of goods and services that takes place across international boundaries.international boundaries.
When a country is involved in International Trade.
Open economyOpen economy
Exports or Imports
GNP
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1. Principle of Comparative Advantage1. Principle of Comparative Advantage
GAINS FROM TRADEGAINS FROM TRADE
Economic resources are scarce & exhaustible, need to optimise use of them.
Countries differ in factor endowments.
The opportunity cost of producing the same good may differ between countries
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1. Principle of Comparative Advantage1. Principle of Comparative Advantage
GAINS FROM TRADEGAINS FROM TRADE
Countries should specialise in producing those goods in which they have the lowest lowest opportunity costsopportunity costs or greatest comparative greatest comparative advantageadvantage.
Countries with higher opportunity costs of production should import from a lower opportunity cost country.
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Benefits
International specialisation
more efficient use of the world’s economic resources
increase world output
Through international trade
increase consumption and living standard
GAINS FROM TRADEGAINS FROM TRADE
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2. Exploitation of economies of scale2. Exploitation of economies of scale
There are many goods which are produced under decreasing cost conditions as their output expands economies of scale.
The home market may be too small need to get a world market for the good
Especially for countries with small domestic markets Switzerland, Singapore, Singapore, Belgium, Denmark, Israel
GAINS FROM TRADEGAINS FROM TRADE
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3. Vent for surplus - the various types of 3. Vent for surplus - the various types of economic resources are unevenly distributed economic resources are unevenly distributed throughout the worldthroughout the world
due to geographical facts, physical features, & climatic difference
E.g. Africa in gold & diamonds;Arab countries in oil;West Malaysia in rubber;Brazil in coffee
GAINS FROM TRADEGAINS FROM TRADE
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Thus, international trade originated on the basis of nations exchanging their products for others which they do not or could not produce for themselves.
Trade provides the vent for surplus production allowing the country to earn foreign exchange from exports which its has surplus of to purchase what it does not have or has insufficient supplies.
GAINS FROM TRADEGAINS FROM TRADE
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Trade widens consumers’ choice
Consumers have a higher level of satisfaction
GAINS FROM TRADEGAINS FROM TRADE
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4. Supplement domestic supply - the 4. Supplement domestic supply - the international mobility of resources is international mobility of resources is extremely limitedextremely limited
Moving goods made by these factors
Nations with abundant land relative to labourwill supply land-intensive goods
Nations with abundant labour relative to landwill supply labour-intensive goods
exchange
E.g. land is geographically immobile, & labour mobility is restricted by language & customs
GAINS FROM TRADEGAINS FROM TRADE
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5. There are differences in taste – a dd factor5. There are differences in taste – a dd factorAssume ~ 2 countries A and B which can produce meat and fish equally successfully.
Country A• dislike meat; like fish• meat - cheap• fish - expensive
Country B• like meat; dislike fish• meat - expensive• fish - cheap
With trade:• A buys cheap fish from B; B buys cheap meat from A • Prices of fish & meat in both countries tend to equalise• Incomes of farmers in A will rise• Incomes of fishermen in B will rise
Without trade:
GAINS FROM TRADEGAINS FROM TRADE
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6. Widen range of goods - there exists 6. Widen range of goods - there exists product differentiationproduct differentiation
Consumers desire greater choice of goods.
Many advanced countries have developed trade with one another in what are essentially the same goods such as cars, washing machines, etc.
GAINS FROM TRADEGAINS FROM TRADE
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In Japan, the motor car industry is capable of producing all cars demanded in the Country (Toyota, Nissan, Honda etc) but some Japanese residents may prefer to buy Continental or UK, American cars (Jaguar, Rolls Royce)
GAINS FROM TRADEGAINS FROM TRADE
GainGain::
Consumers enjoy the luxury of this variety - increase total utility, increase total utility, a real advantage of international trade
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7. Avoidance of development of domestic 7. Avoidance of development of domestic monopoliesmonopolies.
Economic efficiency increasesEconomic efficiency increases• domestic monopolies are broken down by
foreign competition• producers forced to keep prices and costs
low & quality of products high
consumers gainconsumers gain
competition increasescompetition increasesWith tradeWith trade
GAINS FROM TRADEGAINS FROM TRADE
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8. An engine of growth.8. An engine of growth.
demand for a country’s exports will grow especially when these exports have a high income Ed
an increase in national income
In a growing world economy
GAINS FROM TRADEGAINS FROM TRADE
AD = C + I + G + X - Man increase in injection and AD
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Trade can act as a stimulus to economic development to developing countries through the transfer of new technology & methods of transfer of new technology & methods of productionproduction.
GAINS FROM TRADEGAINS FROM TRADE
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9. Non-economic advantages9. Non-economic advantages
leads to a degree of economic interdependency
Trade can foster better international relations & political links among nations.
GAINS FROM TRADEGAINS FROM TRADE
reduces the likelihood of war
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Limitations to International Limitations to International Specialisation & TradeSpecialisation & Trade
(Arguments for Protectionism)(Arguments for Protectionism)
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With free trade With free trade changes in pattern of changes in pattern of demand demand supply side need to respond supply side need to respond butbut resources immobile resources immobile structural structural unemploymentunemployment
To protect infant industriesTo protect infant industriesTo protect against unfair competitionTo protect against unfair competitionTo protect against demerit goodsTo protect against demerit goodsTo protect the balance of paymentsTo protect the balance of paymentsTo avoid dangers of over-specialisationTo avoid dangers of over-specialisationTo improve terms of tradeTo improve terms of tradeStrategic reasonsStrategic reasons
Non-economic arguments – political decsisionsNon-economic arguments – political decsisions
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QtyQty
PricePriceSSAA
DDAA
00QtyQty
PricePrice
SSBB
DDBB
00Country ACountry A Country BCountry B
PPAA
PPBB
Pattern of Trade Using Supply and Demand Analysis
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QtyQty
PricePrice
SSAA
DDAA
00
Country ACountry A
PPAA
PPBB
PPTT
AA
EE
CCFF
BB
ImportsImports
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QtyQty
PricePrice
SSBB
DDBB
00
Country BCountry B
PPAA
PPBB
PPTT
ExportsExports
AA
CCEE
FF
BB