Economics Unit 4- International Trade and Protectionism (full topic notes)

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Preview of Economics Unit 4- International Trade and Protectionism (full topic notes)

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International Trade and
Why do countries trade
Patterns of trade
Advantages/ Disadvantages
Trade protectionism
LDC trade vs MDC trade
o Trade: Trade is the exchange of goods and services between two or more parties.
o Free Trade: Free Trade is when there are no artificial barriers set, by governments in
order to restrict the flow of goods and services between trading nations. Free movement of
goods and services between different countries.
o Fair Trade: Is Trade that satisfies certain criteria on the supply chain of the goods involved,
usually in the form of fair payments for producers often with regards to other social and
environmental factors. It promotes good standards for international labour and gives
workers a sense of economic self-sufficiency through fair wages and good employment
opportunities to the economically disadvantaged populations.
o Protectionism: Government actions and policies that restrict or restrain international trade,
often done with the intent of protecting local businesses and jobs from foreign competition. Typical
methods of protectionism are import tariffs, quotas, subsidies or tax cuts to local businesses and
direct state intervention.
o Trade Barriers: Are policies, such as tariffs quotas and tax cuts, that are put in place in order to
protect domestic producers from international competition by redirecting instead of creating trade

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Why do countries Trade?
o To gain goods and services that your countries is not able to produce or produce
o Trade to gain natural resources, technology, skills which are not evenly distributed in
the world.
o Factors of Production aren't mobile internationally
o International specialisation and division of labour leads to economies of scale,
therefore you can improve your competitive edge in the global market.
o Sharing information and technology leads to a reduction in prices and costs globally.…read more

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Trade Theories:
Theory Diagram
Absolute advantage is an
Absolute advantage in the production of
advantage a good enjoyed by one country
over and above another when
it uses fewer resources to
produce that good than the
other country does. Output
levels cannot be improved by
any other allocation of
resources within the
economies.…read more

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Forms of Protectionism:
o Quantity control: Trade embargos, tariffs, quantitative restrictions, voluntary
export constraints, quotas.
o Fiscal control: Subsidies to regions ­ exports, public corporations.
o Administrative control: Health and safety controls, marks of orgin, technical
standards, customs procedures, environmental measures.
Terms of Protectionism:
o Dumping: A firm or industry's sale of products on the world market at prices
below its own cost of production, damages its competitors in other countries.
o Quota: A limit on the quantity able to import.…read more

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Therefore gov't can put tariffs in place to bring the cost of international firms goods
to the level it should be at.
Advantages/ Disadvantages of Trade and Protectionism:
Advantages Disadvantages
Trade o Specialisation occurs in countries o Removes national monopolies
for primary produce. to replace them with
international monopolies.
o Increased competition-> dilution
of Monopoly powers.
o Transport costs outweigh
o Greater pressure on firms to
keep costs and prices down.…read more

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Protectionism o Stimulates geriatric economies o Creates trade retaliation/ trade
o Good for agriculture
wars (banana wars 90s)
o Less consumer choice
o Stops exploitation of labour
o Less competition -> higher
o Develops countries export base
prices-> inflation
o Sense of national identity o Widen inequality gap.
o Reduces current account deficit o Slows economic growth
o Increase employment o Jobs losses in export industries
o Stops dumping
o Avoids import dependency
Trade ­ LDC vs.…read more

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Raising prices by faming cartels ­ in the SR quota restrictions may be imposed, decrease in
o Stabilising prices by operating a buffer stock scheme- in reality buffer stock schemes aren't
easy to operate, goods are perishable and costs are high.
Long term problems
o Inefficient agricultural practices
o Poor infrastructure
o Civil conflicts
o Miniaturisation: reduction of raw materials less imported from LDCs.
o Demand for imported goods is price elastic, and income elastic.
o Synthetic subsitutes reduce the demand for LC exports.…read more

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Import substitution policies: protectionism.
o Export promotion/ open door policy
o Sustainable trade.…read more

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Economies of Scale
J-Curve…read more


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