Patterns of Trade
Trade is 3x the level of that in the 1990s due to
- Increased integration of emerging economies
- Growth of exports (electronic products and computers)
- Growth of global supply chains- increased exports
- Increased trade with LEDCs
- Increased specialisation across several countries
The Law of Comparative Advantage
CAN BE APPLIED TO SPECIALISATION OR DIVISION OF LABOUR Q's
- An increase in FOP or scale of production = proportionate increase in output. Straight PPF line
- No transport costs
- No barriers to international trade
- Perfect mobility of FOP between different uses
- Externalities are ignored e.g external costs
Comparative Advantage- A country can produce a good at a lower opportunity cost than another country. You would not specialise if opp cost ratios were the same e.g 5/10 and 2/4
Absolute Advantage- A country can produce more of a product than another country with the same amount of resources, the unit cost of production is lower.
- Free trade is not necessarily fair trade (monopsonies may exploit suppliers)
- Law of CA is based on unrealistic assumptions such as constand COP, zero transport costs
Terms of Trade
Relevant when discussing primary product dependancy
Terms of Trade- Ratio between the price of the goods that a country exports vs price of the goods that a country imports. (index of export prices/index of import prices x 100)
- If opportunity cost were the same there would be no benefit from specialisation. For it to be beneficial it must lie between the opportunity cost ratios.
- If export prices rose the country would benefit from more income
- If import prices rose the country would suffer from more expenditure
1. Tariffs and custom duties- Taxes placed on imported goods which artificially raise the price. Designed to make domestically produced goods more attractive. (diagram)
2. Quotas- Quotas are limits on the quantity of a product imported. The price to domestic consumers will increase and domestic output will rise.
3. Subsidies to domestic producers- Government grants to firms which reduces the COP, causing supply curve to shift right. Prices does not change but output will rise.
4. Administrative regulations- GATT and WTO agreements have reduced tariffs, countries have resorted to alternative methods to restrict imports: health and safety reg, environmental reg, labelling of products, bureaucracy (e.g vast number of forms to fill out)
Disadvantages of Protectionism- (methods of restricting trade)
- May cause retaliation, raised tariffs on other countries
- Inefficiency as domestic firms will face reduced competition
- Distorts comp adv
- consumer choice is restriced
Trading Bloc- group of countries within geographical region designed to reduce or remove barriers for member countries. E.g EU, NAFTA, EAC, SADC
Types of trading blocs-
- Free trade areas- barriers are removed between member countries, but each member can impose trade restrictions on non-members
- Custom unions- there is free trade between member countries combined with a common tariff for non-members, i.e tax is imposed at an agreed rate.
- Common markets- these have the same characteristics as customs unions but include free movement of FOP between member countries. Labour tends to be most mobile.
- Monetary Unions- Custom unions which adopt a common currency.
The goal of the WTO is to promote free trade. Trading blocs promote free trade within member countries however restrict it with non-members. Therefore, trading blocs could conflict with WTO goals.
However, number and size of trading blocs has been increasing- played important role in promoting free trade.
Globalisation- increased economic integration between countries. Globalisation has taken place by:
- Increased trade as proportion of GDP- trade as % of GDP increased from 25% to 57%, demonstrating increased integration
- Increased FDI- many manufacturing plants have moved from developed countries to low wage developing ones
- Increased capital flows between countries- money flowing into and out of stock markets, mergers and acquisitions across countries have grown.
- Increased movement of labour between countries- free movement of labour (common market) contributed to globalisation.
Causes of Globalisation
Financial Crisis of 2008 has restricted further integration after 40 years of rapid globalisation.
- Decreased transport costs- Containerisation has meant more can be transported as low AC due to economies of scale.
- Decreased communication costs- Developments in the internet broadband, 4G, technology played significant role in globalisation.
- Reduction in World trade barriers- WTO reduced trade barriers, helped globalisation.
- Collapse of Communism- Introduction of market economy, and collapse of communism in china, increased rates of economic growth, FDI, major manufacturing nation. = globalisation
- Growth of trading blocs- help to promote globalisation, no extra tariff for exports, EU, NAFTA
- Increased importance of TNCs- TNCs undertaken much FDI, which frequently involves moving manufacturing to a country where COP are lower. (OFFSHORING)
Benefits of Globalisation
- Higher living standards- With lower trade barriers and increased trade, countries can specialise and carry out comp adv. Higher world output = increased living standards
- Economies of scale- Producing at larger scale- LR AC fall, profits rise
- Lower prices- Offshoring, moved to countries with cheaper COP, lower real prices, increased consumer surplus
- Increased consumer choice- Increase in world trade, more goods in different countries
- Reduction in absolute poverty- developing countries more closely integrated increased GDP, reduced poverty
- Increased tax revenue- as GDP rises, governments receive increased tax from individuals = can spend more on economy- education, health, infrastructure
- Technology transfer- TNCs invest in other countries, bring advanced technology with them. Domestic firms will benefit from technology- increased productivity. TNC also likely to bring new managerial techniques designed to increase productivity
Costs of Globalisation
- Negative externalities- Increased production and trade means greater external costs e.g air pollution.
- Over-dependence on imports- A country which does not have a competitive advantage may rely increasingly on imports, cause deterioration in current account.
- Risk of contagion increased- More susceptible to global economic crises. e.g 2008
- Loss of culture in a country- MNC take over e.g mcdonalds, loss of culture
- Increased inequality- Demand for unskilled labour has decreased, increased earnings gap
- Exploitation of labour- TNCs exploit workers in developing countries, low wages. Child labour.
- Exploitation of resources- Aggressive investment on natural resources in order to secure future supplies.
- Tax avoidance- TNCs engage in transfer pricing to minimise their tax burden in countries with relatively high corporate taxes.
Transfer pricing- refers to price that has been charged by one part of a company for products it provides to another part of the same company. TNCs can declare profits in the country corp tax is lowest.