International Economics: International trade


Benefits from Trade

  • Increased domestic production and consumption as a result of specialisation. 
  • Economies of scale
  • Greater choice for consumers
  • Increased competition and greater efficiency in production
  • Lower prices for consumers
  • Acquiring needed resources
  • Efficient allocation of resources with free trade
  • Source of foreign exchange
  • Trade makes countries interdependent
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Absolute Advantage

Free Trade: the absence of government intervention of any kind in international trade so that trade takes place without any restrictions

Absolute Advantage: The ability of one country to produce a good using fewer resources than another country
Theory of Absolute Advantage: if countries specialise in and export the good in which they have an absolute advantage, the reult is increased production and consumption in each country.  

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Comparative Advantage

Comparative Advantage: A country has a comparative advantage in the production of a good when this can be produced at a lower opportunity cost than its trading partner. 
Theory of Comparative Advantage: As long as opportunity costs in two (or more) countries differ, it is possible for all countries to gain from specialisation and trade according to their comparative advantage. The global allocation of resources improves, resulting in greater global output and greater global consumption, allowing countries to consumer outside their PPC 
Source of comparative advantage: differences in factor endownments (differences in quantities and qualities of factors of production and levels of technology) 

Unrealistic assumptions:
- Factors of production are immobile and fixed, Technology is fixed
- There is perfect competition
- There is full employment of resources
- Imports and exports balance each other
- There is free trade
- Ignores transportation costs
- Specialisation according to comparative advantage may not allow necessary structural changes in and economy
- Lead to excessive specialisation and dependency 

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World Trade Organisation

- Administer WTO trade agreements
- Provides a forum for trade negotiations
- Handles trade disputes
- Monitors trade policies

- Non-discrimination between partners
- Free trade
- Predictability
- Promotion of fair competition
- Development on economic reform 

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Restrictions on Free Trade: Trade protection

Trade protection: government intervention in international trade through the imposition of trade restrictions to prevent free entry of imports ino a country or to protect the domestic economy from foreign competition

Tariffs: taxes on imported goods
- misallocation of resources caused by increased procution in inefficient producers and decreased consumption by consumers

Import Quotas: a legal limit to the quantity of a good that can be imported over a particular time period

Subsidy: payments per unit of output granted by the government to domestic firms that compete with imports

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Arguments For and Against Trade Protection

Against trade protection/ For free trade:
- Only producers and workers gain  
- Reduced inefficiency
- consumer loses - higher prices and lower quantity
- Global misallocation of resources due to increase production of inefficient firms
- Negative effect on export competitiveness

For trade protection/ Against free trade: 
- Infant Industry argument: applying trade protections so that firms can achieve economies of scale in order to establish its efficiencies in production so it can compete with large international firms. 
- National Security: essential industries need to produced itself so there is no dependency in emergencies (wars) 
- Diversification: For developing countries- Increasing the variety of goods and services produced.  
- Source of government revenue: good for developing countries with large informal sector
- Overcome balance of payments deficit
- Protect domestic employment

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