3. Meet Winston. He’s representing the UK in ‘The Great Economics Snail Race’!
He is going to compete against snails from other countries over 4 different heats.
Your task is to decide which position you think that Winston will finish (out of 5)
and which snail will win in each race.
Get ready to start!
8. A Level Economics – Year 2 (A2) Revision Workshop
Session 3
International Trade and Exchange Rates
26
9. A Level Economics – Year 2 (A2) Revision Workshop
Session 3 Outline
26
The changing pattern of global trade
The balance of payments, and current account deficits
Theories of free trade and protectionism
Analysis and evaluation of exchange rate systems
10. A Level Economics – Year 2 (A2) Revision Workshop
What is “global trade”?
26
The global trade flow
associated with production
of the England football
team’s suits for Euro 2016
11. A Level Economics – Year 2 (A2) Revision Workshop
What is “global trade”?
26
The global trade flow
associated with production
of tennis balls for
Wimbledon
12. A Level Economics – Year 2 (A2) Revision Workshop
The changing pattern of global trade
26
• China’s growth in exports (due to WTO membership &
relaxing of trade barriers)
• Improvements in global transport and
communications links
• Increase in scale/scope of global production chains
• Credit Crunch still affecting access to trade credit
• Some countries increased barriers to trade following
recession to protect their economies
• 50% • 25%
• 16%• 6%
13. A Level Economics – Year 2 (A2) Revision Workshop
Relative share of world exports
26
The EU continues to
have the highest share
– but its share is falling
China is the only
country/region that has
seen an increase in its
share of exports
Russia continues to
have the lowest share –
out of the countries
shown
The US share has fallen,
but its decline has
stalled since 2006
14. A Level Economics – Year 2 (A2) Revision Workshop
Using the chart, identify….
• The only sector in which Emerging Asia will see a decline in its world
share
• The two sectors in which the US and Canada will see an increase in
their world share
• The only sector in which Africa will see a decline in its world share
• Which region currently has just a 1% share in the export of
manufactures
• Which region is expected to have a 30% share in the export of
agricultural goods by 2060
26
Energy
Agriculture and Energy
Agriculture
Africa
US & Canada
15. A Level Economics – Year 2 (A2) Revision Workshop
Drivers of change in the global trade pattern
27
• Slowdown in China, not matched by boom elsewhere (yet!)
• Increased “protectionist mood” – anti-immigrant policies, “buy local” programmes, new
“Cold War”
• Gains from improved transport and communications tech already heavily exploited
• “Death of Distance”
• Process of increased interconnectedness across the globe; increasingly integrated
markets, cultures, policies, economies and industries
• International organisations – WTO, IMF, World Bank, NATO, UN
• Agreements on freer movement of goods, services, capital and labour
• Technology (e.g. communication & transport) allowing global production / rise of MNCs /
global media / containerisation / global financial system
• Increasing role of governments rather than free markets following the financial crisis
• Trade blocs promote trade diversion away from the rest of the world
• Reduced free movement of labour – tighter visa regs, border checks etc (terrorist threat)
16. A Level Economics – Year 2 (A2) Revision Workshop
The Balance of Payments Accounts - Outline
27
Visible Trade (UK -£123.7bn)
Invisible Trade (UK £89.1bn)
“Primary Income” (UK -£33.1bn)
“Secondary Income” (UK -£25.1bn)
Transfer of asset ownership & debt forgiveness (UK -£0.8bn)
FDI / shares (UK £73.9bn)
Currency, deposits etc (UK £81.0bn)
Gold, SDR (UK £7.1bn)
17. A Level Economics – Year 2 (A2) Revision Workshop
Why is a current account deficit harmful?
28
• Deficit a sign of undesirable / uncompetitive exports – leads to
reduction in AD, increase in structural unemployment which is expensive
to tackle
• Example: possibly the US with its strong $ and inefficient production
facilities
Structural issues
(unemployment and
growth)
• Dependent on importing food and essential items, which can be
problematic politically and cause imported inflation; indicates lack of
diversity
• Example: Ethiopia remains dependent on food imports
Over-reliance on other
countries
• The BOP must balance, so a deficit on the current account could be
financed by hot money / currency on the financial account – hot money
is “footloose” and can cause a currency crisis
• Example: many South American countries are struggling following the
US interest rate increase
Financed by hot money
18. A Level Economics – Year 2 (A2) Revision Workshop
Why is a current account deficit not harmful?
28
• During times of economic boom, incomes rise and with a high MPM,
demand for imports will rise (luxuries, choice etc)
• Example: deficits caused by imports of oil, whose price fluctuates
alongside the economic cycle
May be cyclical
• This is the case for many LEDCs – such imports increase LRAS and allow
non-inflationary economic growth, which can lead to development
• Example: South Korea’s Import Substitution Industrialisation policy
encouraged imports of tech and capital, but not imports of consumer
goods and services
May be importing
technology and capital
• Because the BoP must balance, there could be an inflow of FDI on the
financial account – this increases capital, and therefore AS, leading to LR
growth, and a chance to build an export market
• Example: UK manufacturing and hi-tech industry
Accompanied by
strong inwards FDI
19. A Level Economics – Year 2 (A2) Revision Workshop
Do people care about BoP issues?
28
20. A Level Economics – Year 2 (A2) Revision Workshop
28
Producing for a larger worldwide
market means that businesses
can benefit from economies of
scale
Competition forces prices down
due to increased number of
suppliers, and lower production
costs
Greater variety of goods and
services, different cultures and
their products
Greater specialisation according
to comparative advantage
allows output to increase from
the same inputs
Countries that trade with each
other rarely go to war –
improves international relations
and global confidence
Trade is not just in consumer
goods but in capital goods. Also
MNCs and global production
encourages diffusion.
21. A Level Economics – Year 2 (A2) Revision Workshop
Theory of Comparative Advantage
28
Phones
Jeans
120
70
Phones
Jeans
90
60
A B
Countries should specialise in producing the goods that they can produce at a lower opportunity cost than
other countries and then trade. Total world output will rise as a result of the increase in productivity.
Which country has an absolute advantage in producing phones and jeans?
22. A Level Economics – Year 2 (A2) Revision Workshop
Theory of Comparative Advantage
28
Phones
Jeans
120
70
Phones
Jeans
90
60
A B
Countries should specialise in producing the goods that they can produce at a lower opportunity cost than
other countries and then trade. Total world output will rise as a result of the increase in productivity.
Which country has comparative advantage in producing phones?
Give up 0.583
jeans to make 1
phone
Give up 0.667
jeans to make 1
phone
Country A has the comparative advantage in producing phones
23. A Level Economics – Year 2 (A2) Revision Workshop
Theory of Comparative Advantage
28
Phones
Jeans
120
70
Phones
Jeans
90
60
A B
Countries should specialise in producing the goods that they can produce at a lower opportunity cost than
other countries and then trade. Total world output will rise as a result of the increase in productivity.
Which country has comparative advantage in producing jeans?
Give up 1.71
phones to make
1 pair of jeans
Give up 1.5
phones to make
1 pair of jeans
Country B has the comparative advantage in producing jeans
24. A Level Economics – Year 2 (A2) Revision Workshop
Problems with the theory of comparative advantage
28
Ignores
transport
costs
Ignores
externalities
Assumes
perfect
factor
mobility
Assumes
constant
opportunity cost
Static rather
than dynamic
Ignores
“strategic
industries”
Overly
simplistic
25. A Level Economics – Year 2 (A2) Revision Workshop
Types of protectionist measures
29
Tariffs
Quotas
Embargoes
Non-tariff
barriers
/red tape
Export
subsidies
Boeing (US) &
Airbus
(France)
China’s hefty
tariffs on US
poultry
Algeria’s car
import quotas
– and
Volkswagen’s
production in
AlgeriaEU and Russia
sanctions
Safety
regulations on
imports
26. A Level Economics – Year 2 (A2) Revision Workshop
The Tariff Diagram
29
A B
AB
CD
C D
27. A Level Economics – Year 2 (A2) Revision Workshop
Why do countries use protectionist measures?
29
Infant industry and sunset industry argument
• New industries need time to benefit from economies of scale and become competitive enough to survive international
competition; in old industries, workers need time to retrain
Improve economic diversity
• Economies don’t want to suffer from a “resource curse” or struggle with over-reliance on one industry
Protect jobs and encourage growth
• Import Substitution strategies can increase AD, and since demand for labour is a derived demand, jobs are protected
Strategic industries argument
• These could include food, weapons, energy, water etc
28. A Level Economics – Year 2 (A2) Revision Workshop
29Protectionist measures can protect jobs, especially for low-paid or low-skilled
workers who would otherwise struggle to find work
Low-skilled workers are often occupationally and geographically immobile,
and may work in industries which are increasingly suffering from competition
from low-cost producers overseas
Thousands of jobs in the UK were lost in 2015 from the closure of Tata’s and SSI’s steel-
plants in places such as Scunthorpe and Glasgow due to Chinese competition. Many
workers and MPs believe that subsidies would have helped prevent the crisis.
However, overseas manufacturers are more competitive and efficient, so it is better for
the UK economy if cheap steel is imported – it keeps down cost-push inflationary
pressures, and can stimulate steel-using UK industries, such as car manufacturing.
Furthermore, steel subsidies to protect against overseas competition would be
expensive and difficult to justify in the current economic climate of continued austerity.
The money could be better spent providing retraining for displaced workers.
The benefits of protectionist measures, such as subsidies, in order to protect jobs, will only
be felt in the short-term; in the long term they are likely to prove too costly. The gov’t
should instead help with retraining and improving occupational mobility of steel workers.
29. A Level Economics – Year 2 (A2) Revision Workshop
Exchange Rates – Key Terms
30
30. A Level Economics – Year 2 (A2) Revision Workshop
Exchange Rates – Key Terms
30
31. A Level Economics – Year 2 (A2) Revision Workshop
Exchange rate movements – appreciation or
depreciation?
31
Increased demand for £
Decreased demand for £
Inc D for £
Decreased supply of £
Increased supply of £
32. A Level Economics – Year 2 (A2) Revision Workshop
Additional Activities
More detail on the changing nature of international trade
Calculating comparative and absolute advantage
Analysis of the role of the WTO
Understanding Optimal Currency Areas
Evaluating Brexit
Types / levels of economic integration
Evaluating the impact of changing exchange rates
32
Editor's Notes
Data from the 2015 Pink Book – the data for the Financial Account has been simplified.
Worth pointing out that in theory it should balance but in practice we need to use a Net Errors and Omissions term
Chart comes from here: c
Algerian car import quotas: http://country.eiu.com/article.aspx?articleid=343929018&Country=Algeria&topic=Economy&subtopic=Forecast&subsubtopic=Policy+trends&u=1&pid=93913793&oid=93913793&uid=1
Boeing and Airbus have both received subsidies from their respective governments
China imposed a 104.2% tariff on imports of US poultry a few years ago in the tit for tat trade wars between the two countries
EU-Russia embargoes and sanctions – tit for tat - http://www.bbc.co.uk/news/business-28539928
