Theme 4 Key Idea 2 - Trade

International Trade

All countries rely on trade in order to thrive, which means that all countries are interdependent on each other. However, in terms of trade, rich and poor countries differ/

MEDC: Export manufactured goods at a high price. Manufactured goods have a steady increase in price, and thus can bring stability to an economy.

LEDC: Export primary/raw goods at a low price. These goods have a fluctuating price which can bring instability to an economy. This puts LEDC at an economic disadvantage which has caused an increase in poverty.

International trade had its roots in a batering system, which was replaced by a system of mercantilism in the 16th/17th century, then saw a shift towards liberalism in the 18th century. Despite this, the reasons for trade have remained the same:

• Stop economic stagnation
• Develop a country's infastructure
• Increase in employment oppertunities
• Make alliances between trade partners
• Greater choice of consumer goods
• Increased competition drives quality up at a lower price
• Speeds up technological progress

Adam Smiths 'The Wealth of Nations' 1776 was a direct attack on the mercentile system. He advocates the purchase of good quality products at a good price to benefit those who produce the product. This includes 4 rules:

• 1. Specialisation - Over time you will become more productive and efficient with your chosen job.
• 2. Consumer Capitalism - Producing wealth to trickle down and benefit those at the bottom
• 3. Educate the Richest - Give them status, don't tax them or they will take the wealth elsewhere
• 4. Educate consumers - encourage the purchase of high quality products

Neo-Liberalism

The 1970's saw a movement to stop the growth of 'state hand' in trade. advocating for market fundamentalism, in which people put their faith in the market system to solve social and economic problems.

Neo-liberalism was an extension from liberalism. Liberalism allowed a little bit of regulation on businesses, as well as progressive taxation, neo-liberalism advocated for a free market.

Absolute and Comparative Advantage

A country has an absolute advantage over another country when it can use fewer resources to produce a product. This is problematic, as it does not create a level playing field in the global market.

A country has a comparative advantage if a country can produce goods at a lower oppertunity cost in terms of other goods. An oppertunity cost is the…