Why countries trade with each other:
- To obtain goods that they cannot produce themselves
- To increase choice
- To obtain goods at a cheaper price than what they can produce themsleves
- To make more revenues and profits. It is an extra place in which to sell thier goods
- countries specialise in the production of goods and services at which they are better- to exploit a comparative advantage
What is COMPARATIVE ADVANTAGE?
Where one country can produce a good at a relatively cheaper cost in terms of other goods than another producer- so both countries can make/produce the same good- but its cheaper for country A to make the good than country B- so they trade.
The UK and COMPARATIVE ADVANTAGE
In recent years the UK had a comparative advantage in a number of manufacturing industries such as textiles or motorcycles. This was because the UK had lots of natural resources and raw materials, trained workers and lots of relevant machinery.
However, now this comparative advantage has been lost to other areas of the world particulary Asia. They have extremely cheap labour, new technology and low transport costs.
The UKs comparative advantage now may well be in:
- Financial services (insurance/banking)
Advantages of trade to the UK economy
- Income- increased production means more workers are needed and this means more jobs
- Growth- selling more exports abroad means increased production which leads to higher economic growth- increase GDP each year
- Choice- UK citizens can choose from gooods which are not otherwise available in the UK
- Prices- many of the consumer goods we buy today are imported from countries like China and India- these countries have lower labour costs than the UK and good technology and so can produce these goods more cheaply than the UK
- Competitiom- Keeps UK companies on thier toes to compete in world markets- all companies have to work harder to attract consumers- by lowering prices and developing more attractive and better quality products
- Raw Materials- UK is poor in raw materials so it is essential we import these- metals,gems,energy
Disadvantages of trade to the UK economy
- Competition- UK frims may find it difficult to compete with cheaper imports and greater variety from abroad
- Economic Dependancy- UK imports a large variety of food- if this is interuppeted it might threaten our survival
- Unstable Commodity Prices- the prices of raw materials and food and stuff can change very quickly- if they go up in prices, UK citizens have to pay more
- Environmental- carbon footprint- goods coming from other countries require more energy to transport them- this leads to higher CO2 emissions