2008 H2 International Trade Lecture 1


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"What is meant by Globalisation? Explain the factors that have led to enhanced interdependence of economies in recent years, and discuss the consequences on your economy."

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2008 H2 International Trade Lecture 1

  1. 1. International Economics
  2. 2. International Trade Balance of Payments Exchange Rate
  3. 3. 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
  4. 4. International trade exchange of goods and services that takes place across international boundaries. When a country is involved in International Trade. Open economy Exports or Imports GNP
  5. 5. 1. Principle of Comparative Advantage GAINS FROM TRADE <ul><li>Economic resources are scarce & exhaustible, need to optimise use of them. </li></ul><ul><li>Countries differ in factor endowments. </li></ul><ul><li>The opportunity cost of producing the same good may differ between countries </li></ul>
  6. 6. 1. Principle of Comparative Advantage GAINS FROM TRADE Countries should specialise in producing those goods in which they have the lowest opportunity costs or greatest comparative advantage . Countries with higher opportunity costs of production should import from a lower opportunity cost country.
  7. 7. Benefits <ul><li>International specialisation </li></ul><ul><li>more efficient use of the world’s economic resources </li></ul><ul><li>increase world output </li></ul><ul><li>Through international trade </li></ul><ul><li>increase consumption and living standard </li></ul>GAINS FROM TRADE
  8. 8. 2. 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, Belgium, Denmark, Israel GAINS FROM TRADE
  9. 9. 3. Vent for surplus - the various types of economic resources are unevenly distributed throughout 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 TRADE
  10. 10. 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 TRADE
  11. 11. Trade widens consumers’ choice Consumers have a higher level of satisfaction GAINS FROM TRADE
  12. 12. 4. Supplement domestic supply - the international mobility of resources is extremely limited Nations with abundant land relative to labour will supply land- intensive goods Nations with abundant labour relative to land will supply labour- intensive goods exchange E.g. land is geographically immobile, & labour mobility is restricted by language & customs GAINS FROM TRADE Moving goods made by these factors
  13. 13. 5. There are differences in taste – a dd factor Assume ~ 2 countries A and B which can produce meat and fish equally successfully. <ul><li>Country A </li></ul><ul><li>dislike meat; like fish </li></ul><ul><li>meat - cheap </li></ul><ul><li>fish - expensive </li></ul><ul><li>Country B </li></ul><ul><li>like meat; dislike fish </li></ul><ul><li>meat - expensive </li></ul><ul><li>fish - cheap </li></ul>With trade: <ul><li>A buys cheap fish from B; B buys cheap meat from A </li></ul><ul><li>Prices of fish & meat in both countries tend to equalise </li></ul><ul><li>Incomes of farmers in A will rise </li></ul><ul><li>Incomes of fishermen in B will rise </li></ul>Without trade: GAINS FROM TRADE
  14. 14. 6. Widen range of goods - there exists product 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 TRADE
  15. 15. 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 TRADE Gain : Consumers enjoy the luxury of this variety - increase total utility, a real advantage of international trade
  16. 16. 7. Avoidance of development of domestic monopolies . <ul><li>Economic efficiency increases </li></ul><ul><li>domestic monopolies are broken down by foreign competition </li></ul><ul><li>producers forced to keep prices and costs low & quality of products high </li></ul>GAINS FROM TRADE consumers gain competition increases With trade
  17. 17. 8. An engine of growth. In a growing world economy GAINS FROM TRADE demand for a country’s exports will grow especially when these exports have a high income Ed an increase in national income AD = C + I + G + X - M an increase in injection and AD
  18. 18. Trade can act as a stimulus to economic development to developing countries through the transfer of new technology & methods of production . GAINS FROM TRADE
  19. 19. 9. Non-economic advantages Trade can foster better international relations & political links among nations. GAINS FROM TRADE leads to a degree of economic interdependency reduces the likelihood of war
  20. 20. Limitations to International Specialisation & Trade (Arguments for Protectionism)
  21. 21. With free trade  changes in pattern of demand  supply side need to respond but resources immobile  structural unemployment To protect infant industries To protect against unfair competition To protect against demerit goods To protect the balance of payments To avoid dangers of over-specialisation To improve terms of trade Strategic reasons Non-economic arguments – political decsisions
  22. 22. Qty Price S A D A 0 Qty Price S B D B 0 Country A Country B Pattern of Trade  Using Supply and Demand Analysis P A P B
  23. 23. Qty Price S A D A 0 Country A P T A E C F B P A P B Imports
  24. 24. Qty Price S B D B 0 Country B P B A C E F B P A P T Exports