Why do Countries Trade?
This is a great little intro video on the benefits of Trade
Key Terms
An Export is any good or service provided by the residents of a country that causes money to come into the country.
An Import is any good or service purchased by the residents of a country which causes money to leave the country.
Visible Exports are any physical goods provided by the residents of a country which causes money to come into the country.
Visible = computer chips, clothes, cars etc…
Invisible Imports are any services purchased by the residents of a country which causes money to leave the country.
Invisible = Tourism, foreign workers repatriating money, Rory McIlroy sends winnings from the US back to Northern Ireland.
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Why do we Import?
- To get raw materials not available in our own country. (Oil)
- In order to get consumable goods not producible (at reasonable cost) in our own country. (bananas, cars)
Why do we Export?
- To earn money (foreign currency) to buy imports.
- To increase our production level to obtain the benefits of economies of scale.
- To sell off surplus production.
- In order to create employment in our own country.
- In order to increase our national income and our standard of living
- To create economic growth or stimulate the economy.
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Laws of Trade
A country
has an absolute advantage when it
uses less of its resources to produce one unit of a product than the other
country uses.
The Law of Absolute Advantage states that
countries will benefit from trade so long as each of the countries trading has
an absolute advantage in one of the goods.
The Law of Comparative (Relative) advantage
(Ricardo) states that countries should trade with each other and will gain
mutual benefit from trade if they specialise in the production of those goods
and services in which they are relatively most efficient and obtain their other requirements through trade.
In one hour
Harry can make 8 cakes or 12 cups of tea, William can make 6 cakes or 6 cups of
tea.
With trade they decide that Harry should specialize in making tea, while William specializes in making cake.
Now the two
boys have increased their tea production by 6 cups (33%) and only reduced their
cake production by 2 cakes (15%) making them better off as a whole.
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Assumptions governing the Laws of
Absolute and Comparative Advantage
- There is free trade.
-
Transport costs do not exist.
-
There is mobility of factors of production.
-
There are constant returns to scale.
-
The benefits of trade are shared between the
countries.
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Free Trade
Argument for Free Trade
- Trade and in particular specialization (law of
comparative advantage) make society and the two trading partners better off
overall. (however not necessarily both of them)
Arguments against Free Trade
- To protect employment
- Infant industry
- protect the balance of
payments
- protect against competition
from low wage countries
- maintain government revenue
- prevent dumping
- Retaliation
- Strict domestic laws governing
production. (Irish Beef)
Ways of restricting Free Trade*
- Custom duties (tariffs)
- Quotas
- Embargoes
- Exchange control regulations
- Administrative regulations
- Subsidies to domestic producers
*not allowed
between members of the EU.
***Exam Analysis***
International Trade used to be a banker for a full or nearly a full question up until 2010 and 2011. It made a comeback last year with a relatively straight forward question.
2012 Q7 (55)
2009 Q7 (60)
2008 Q5 (55)
2007 Q7 (55)
2006 Q6 (75)
2005 Q5 (75)
International Trade used to be a banker for a full or nearly a full question up until 2010 and 2011. It made a comeback last year with a relatively straight forward question.
2012 Q7 (55)
2009 Q7 (60)
2008 Q5 (55)
2007 Q7 (55)
2006 Q6 (75)
2005 Q5 (75)
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