International Trade International Trade tutor2u www.igcseeconomics.com - Resources, Past Papers, Notes, Exercises & Quizes What is Free Trade? • Free trade represents trade between countries without the introduction of artificial barriers • International trade reflects exchange and specialization • Exchange: countries supply goods and services that they can produce relatively cheaply and buy products from other countries that they would find relatively expensive to produce • Specialisation: benefits from trade are increased if there are economies of scale from production and if countries specialise their resources in producing certain commodities tutor2u www.igcseeconomics.com - Resources, Past Papers, Notes, Exercises & Quizes What is Free Trade? • In an open economy, one nation trades openly with other • Trade in goods • Trade in services • Free flow of financial capital • Free flow of labour resources tutor2u www.igcseeconomics.com - Resources, Past Papers, Notes, Exercises & Quizes Trade tutor2u www.igcseeconomics.com - Resources, Past Papers, Notes, Exercises & Quizes Trade (2) tutor2u www.igcseeconomics.com - Resources, Past Papers, Notes, Exercises & Quizes Intra-Firm Trade • Intra-firm trade is becoming increasingly important • For example a USA fruit drinks manufacturer might export some of its raw materials to the UK to produce fruit juices that are manufactured / bottled and distributed to the UK and Western European markets tutor2u www.igcseeconomics.com - Resources, Past Papers, Notes, Exercises & Quizes Why trade? tutor2u www.igcseeconomics.com - Resources, Past Papers, Notes, Exercises & Quizes The Potential Advantages from Trade (1) • Competition: • Increased competition for suppliers • Greater pressure on businesses to keep their costs and prices down • Increased competition can lead to a dilution of monopoly power – which reduces the potential for exploiting consumers • This leads to an improvement in the allocative efficiency of scarce resources tutor2u www.igcseeconomics.com - Resources, Past Papers, Notes, Exercises & Quizes The Potential Advantages from Trade (2) • Comparative Advantage: • If other countries can supply certain goods and services more efficiently – it makes economic sense for them to do so • This makes use of the principle of comparative advantage • It also leads to an improvement in overall productive efficiency tutor2u www.igcseeconomics.com - Resources, Past Papers, Notes, Exercises & Quizes The Potential Advantages from Trade (3) • Improvements in dynamic efficiency • Trade tends to speed up the pace of technological progress and innovation across different industries • Trade provides more choice for consumers • Dynamic efficiency gains become apparent over time – for example improvements in the quality and performance of products at a given price tutor2u www.igcseeconomics.com - Resources, Past Papers, Notes, Exercises & Quizes The Potential Advantages from Trade (4) • Economies of scale (lower LRAC) – representing gains in productive efficiency and leading to higher profits and lower prices for consumers tutor2u www.igcseeconomics.com - Resources, Past Papers, Notes, Exercises & Quizes The Potential Advantages from Trade (5) • Trade is seen as a stimulant to short term aggregate demand and long run economic growth • Exports are an injection of aggregate demand • A boost to exports will have multiplier effects on the level of equilibrium national income • There may be extra supply-side improvements from increased capital investment between companies and countries engaged in international trade tutor2u www.igcseeconomics.com - Resources, Past Papers, Notes, Exercises & Quizes Micro and Macroeconomic Gains Injection of AD – Export led growth – multiplier effects Imports of new technology – LRAS effect Employment creation in growth sectors International Trade Stimulates new capital investment and innovation tutor2u Makes domestic markets more contestable www.igcseeconomics.com - Resources, Past Papers, Notes, Exercises & Quizes Transfer of ideas and best practice “benchmarking” Concept of Comparative Advantage • First developed by David Ricardo, one of the founding fathers of classical economics, in 1817 • Comparative advantage exists when for a country • The opportunity cost of production is lower • A country is more productively efficient than another • Countries will tend to specialise in and then export products which use intensively the factors which it is best endowed • Exports used to finance imports of other products tutor2u www.igcseeconomics.com - Resources, Past Papers, Notes, Exercises & Quizes Importance of trade for developing countries Diversification into manufacturing Less dependence on volatile primary industries Imports of investment goods – boosts LRAS Importance of trade for developing countries Exploitation of comparative advantage tutor2u Transfer of technology and ideas www.igcseeconomics.com - Resources, Past Papers, Notes, Exercises & Quizes Employment and higher real wages in export sectors