International
Trade
The benefits of trade (4)
“Ability to benefit from”
1.Explain how free
trade -> benefit #
For consumer
Lower prices
● Firms import cheap resources = lower costs resemble as lower prices for consumers
High quality
● Non-price competition ->incentive to conduct R&D innovation to remain competitive
More choice
● Larger market/more firms
For producer
Economies of scale (assuming firm is the most efficient producer in world)
● Larger consumer base = higher output = bulk buy
For society
Allocative efficient of resohurce
Unproductive -> productive (can import output they’re not producing efficiently)
In theory if every country produced only the product in which it had a comparative advantage, social
surplus would be maximised & total world output would increase
Source of foreign exchange for LEDCs
● LEDCs export in US$ = to then buy US products (oil)
Trade Protection (to
prevent structural
unemployment within
domestic workers)
type 1 = tariff (tax)
Effect on stakeholders
Trade Protection
type 2 = quota
Effect on stakeholders
Domestic producers = TR increase (employment should increase)
Foreign producers = TR decrease (structural unemployment in China’s steel __ industry)
Consumer =
Government =
Consumers lose = price is higher .:. LOD quantity lower, consumer surplus decreased (a,b,c,d,e,g) lost
Domestic Producer = always gain (protectionism) = employ more output
Society =
Unlike a tariff, the gov gains nothing (tariffboof>quota as gov rev) foreign gain, domestic economy loss
E&f lost (inefficient producers, wasted resources & lost output from market)
B&c transferred to foreign economy, foreign gain vs domestic economy loss
Trade Protection
type 3 = subsidy
Trade Protection
type 4= administrative
barriers
desirable protectionism,
Evaluation of
protectionism
(start with stakeholder
eval for 1, then RLE)
For protectionism
1)“Red Tape”; excessive paperwork/bureaucracy foreign firms complete to sell imports,as firms are
unwilling/unable to incur costs, from employing people for this, acts as a deterrent, Imports become slow,higher costs to
sell imports,ineffective
but quality check, Health & safety regulations
2)Embargo; ban quota=0, .:. Consumers have no choice but to buy domestic products
●
●
●
Protect domestic jobs/Can reduce structural unemployment; increase demand entails increase demand for labour (fig 2)
PED; if elastic (homogenous) .:. tariff effective as encourages import substitution, If PED inelastic. (higher quality, more
productive imported) tariff ineffective RLE* China’s tariff on Australian wine is ineffective.
Costs of production increase; for domestic manufacturing firms that use imported steel (draw secondary S shift left)
unemployment shifted onto an manufacturing industry
Retaliation/Tariff wars; structural unemployment shifted to an export industry (in this case, retraining steel workers appears
better)
●
Protect Infant industries (Friedrich List, Alexander Hamilton); temporary/ST protection until can .. RLE* Samsung.
Inefficient; reliant on gov support, no profit-maximising incentive
●
●
●
Anti-Dumping, uncompetitively low prices, by being unfairly subsidised by gov, or min price -> excess supply; WTO
tariffs can be imposed to offset sub/dumping,undo welfare loss & restore fair competition, justified tariff, , RLE* China’s tariff on
Australian wine & Trump tariff on chinese goods with the reason of anti-dumping.
Difficult to prove; distinguish between efficiency & dumping
Political influences
Difficult to balance equal tariff
●
National Security; self-sufficiency/independence, for if threat of war
Under “Essential” vague definition; excuse to protect all
Health & Safety; if protectionism imposed due to H&S, it should
●
Tax rev for gov; use rev for development (investment towards HDI), + for LEDCs (raise tax from foreign rather than low
income)
MEDCs to tax demerit goods & raise tax rev domestically
Correct a Current Account Deficit;
Against protectionism (for free trade)
Allocatively inefficient,welfare loss; wasted resources (efficient-> inefficient) + lost output
Higher prices for consumers
Amplified by retaliation, “Trade wars”; escalating tariffs
RLE;
US steel (homogenous)
China tariff on australian wine (high quality)
Diagram;
Fig 1, tariff protectionism
Fig 2, Structural Unemployment diagram
Fig 3, effect on supply of manufactured cars (higher costs of f.o.p supply left)
Maths
International trade
Diagram effect of trade protection types 1,2,3 on stakeholders
Essay Evaluation questions
International trade
Evaluate the effect of different types of trade protection, which is best? Depends on LEDC?
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International
Trade
The benefits of trade
For consumer
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Protectionism
type 1 = tariff (tax)
Effect on
Consumer
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producer
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an
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Consumer
Calculate the
empirical effect of
implementing ___ on
stakeholders
prices ,
for small
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Effect on
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-
raver costs
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Teats
Trade Protection
type 4=
administrative
barriers
-
a
opp cost
M2 opp cost, Gov deficit, unsustainable debt but low
unemployment as a result + ripple effect, higher output
may entail more production in other industries
/
seu + guy
t
Puts
price
pomes,,c
seu
MEU
less output = entails structural unemployment in that
industry
Government
Figure 1
agriculture
lower costs f.o.p = higher output = entails more
employment (domestic jobs)
Foreign
producer
( expats
g- output
permit
arms
to
.
money provided by govt
amount g-
pñcect
up
foreign
red
-
tape barrier
__
a set
of paperwork firms
are
toimpatim-oacaunty.it
required
increases
to
fill
in order
costsqexpanng
the
over
policy
to
increase expats rather than decrease
export subsidy
Effect on
price of
steel
Figure 1
in
China
Consumer
(Yvan)
p
Domestic
producer
Foreign
producer
Government
quantity of
steel in
China
Exporting countries
Type 1 export
subsidies
export subsidies
Exports: subsidised price
Arguments for Trade
protectionism
For
Domestic consumption has no subsidy .:. Diff price
domestic jobs
structural urnemplcymeht in expat or even
by avatars
Wal farmers
to protect agenteel
cap → monetary union but fix protectionism
* protectdomestic sobs
egg Eu
-
.
.
avoid
on autarky to
,
the case g- war, emphasis
depleting
Japan's oil reserves in Pearl Hassan attack
national
security
• in
protection of
infant
industries
A
until can benefit from Eos
health
maintenance
*
standards
HIS concerns , ensures high quality
eg
.
.
overdependence contrade
1945
.
dam
imports
environment
avoids transportation (pollution externalities
•
RLE : New Zealand Uk argument
4 WTO bans dumping
-
anti-dumping
Arguments against
Trade protectionism
RRLE : Ching e Australia Barley ,wine
subsidy to
unfair
competition
I
overcoming a
balance of
payments
deficit
A
source of gov
rev (tariff)
*
Against,
corruption
potential
=
ata
pricelater than
Éosts to produces
'
exports imports
overcoming CIA Albeit
-
gunports
i.
ua
protectionism
tariff
tax revenue
particularly it LEDC where cannot gain
social surplus
* whereby
misallocatio
n of
resources
retaliation/
Trade wars
CIA
supply
but excuse ?
is not
income tax
tax revenue from
tariff
unproductive >
"
ProAllure creates
a
welfare loss
*→
China
-
structural
us
µ,
steel 2017 trade wars
unemployment
in
exporting industries
At tax
""
poms Tests a-
.
increased
costs of f.o.p
9W
revenue
=/
goes
to
camp,
berent to tax now gained
-
.
Reason
Lack of competition
As a result
Higher prices for domestic consumers
reduced
export
competitiven
ess,
increased
costs of
imported
f.o.p
if goes against
Borat
/
,
omna.no
gcs
is
inelastic
My
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Econ.Development
Economic development = Increase in the standard of living of an economy’s population, usually measured by the HDI measuring health,education,income)
Absolute poverty = do not earn enough income to afford basic necessities
Poverty tap = poverty passed onto future generations
Productivity = output produced by each labour
Sustainable development = increasing the economic well-being of the present generation without jeopardising the ability of future generations to meet their needs
1.
Explain the difference between economic growth and economic development.
2.
Explain two reasons why it is usually the case that growth will lead to development.
3.
Explain two reasons why sometimes, growth will fail to lead to development.
LEDC characteristics -> Low HDI
common + which component of HDI/development + overcome by investment (LRAS right)
●
How to achieve
economic
development (via
increasing HDI)
Low standards of living; all HDI low, extreme poverty + low incomes + poor healthcare provision, poor education
Poverty trap; individual firms & public agents cannot intervene, compelling argument for gov intervention to break cycle
Investment in education & healthcare, overcoming LRAS right (quality)
Unproductive workers; poor education, poor healthcare, = low incomes = investment in education & healthcare Capital
Widening (constant,more), Capital Deepening (quality),
High population growth; low female empowerment not considered economic agent =high dependency burden on male
income vs bigger households = investment in education & healthcare
High unemployment & underemployment; part-time not full-time formal -> informal work = not taxed, unregulated
conditions, health concern
Over-Dependence on primary product production; low investment+ without capital -> difficult to manufacture = price
volatility (uncertainty), + low YED commodities vs manufactured high YED = add value to goods, LRAS (capital)
But diversity in ; resource endowment, historical background, demographic factors, climate, political system
Investment
Low investment; LRAS lower, Low/poor quality of capital, low productivity, low incomes
High investment; LRAS higher, more capital = more output, more income
Physical capital; tech + infrastructure -> employment + incomes -> Development
Human capital; education+ healthcare -> all HDI components -> development
Natural capital; irrigation + fertilisers, contour ploughing -> employment + incomes -> development
Strong institutions; legal,finance -> confidence and FDI investment -> + incomes -> development
tech
Growth vs
development
growth = Income/output
Development = HDI components (income,healthcare, education) , break in poverty cycle
When growth -> development (each link to higher income & standards of living)
more purchasing power; higher incomes -> S.O.L/HDI component -> if spent on education,healthcare (improving other
parts of HDI) = but, able to use if in absolute poverty?
More investment; overcome poverty cycle, shift LRAS right, higher incomes = but extra income may not go to poor .:.
Inequitable, no development
More tax rev; investment spending on HDI components but corruption,
More employment; higher output entails labour, reducing unemployment & underemployment, but working conditions,
replaced by technology?
When growth but no development (increase output but no HDI components, reduce income,standards of living for all)
Distribution of income; growth concentrated in higher quintiles -> dual economy (geographically,informal vs formal)
Capital intensive production; tech replace workers
Sustainability; degradation, CC, lower standards of living, (market failure diagram + welfare loss)
Composition of output; depends on whether demerit good = low
●
●
●
Measuring econ
development
Development without growth = via reallocating resources (more education & healthcare) or redistributing income (improve
LoS for lower quantiles)
Growth -> development = more income is needed to increase purchasing power, break poverty cycle and enable
investment that bring sustainably higher LoS in LT
SD challenging as emerging from poverty inc industrialisation .:. Pollution, poverty -> degradation
single indicator (specific areas not an economy)
●
●
●
●
●
High GNI per capita; at purchasing power parity PPP exchange rates = high development
GDP per capita vs GNI per capita (actually earned by country’s fop) ; if GNI> good, as net factor income is positive
GDP per capita (only how much people earn) vs GNI per capita (better :what they can buy) At PPP exchange rates
(same $1 exchange rate, how much can be bought )
Same $ to same amount, b
Health (HDI) indicators;
life expectancy
Infant mortality rate
Education (HDI) indicators;
Adult literacy rate
Average/mean school expected years but efficiency?
Economic/social inequality indicators; lower Gino coefficient = more equal income distribution
Composite indicator (economy)
HDI
Exchange rates
Appreciation “Strong currency”/more expensive = an increase in the value of the currency in a freely floating exchange rate system (ER up)
Depreciation “weak currency” = a decrease in the value of the currency in a freely floating exchange rate system (ER down)
Devaluation = Inc
The benefits of tra
#
Reasons to buy £
To buy country A exports
Invest in country A
Savers; if interest rate is higher elsewhere
Stocks
will sell? Or buy? in terms of The market currency in question
Shift factors in D.currency => sell in order to buy, D right
Demand more pounds ((# people of currency wanting to demand)
Increase in D for UK exports
Inflow FDI (invest in UK); Confidence in UK economy
Relative (compared) interest rates for savers;
Forex speculation; Remember- Inflationary pressure ≠ interest rates
Shift factors in S.currency => we buy diff currency & sell pounds, S right
Sell more pounds(# people of currency wanting to sell)
●
Change in D for imports into UK; UK
If British consumers demand more imports, in order to pay them, they must
sell their pounds to purchase the other currency. This causes supply for £ to
shift to the right.
Outflow FDI (invest elsewhere); UK unstable economy, low confidence
Relative interest rates for savers; UK IR is low & Elsewhere IR is high .:.
Move money & save elsewhere
Forex speculation; believe UK£ value will decrease.:. Sell buy
Figure 5 shows the market for the euro, with quantity of euros on the x-axis and price
of the euro (in pounds) on the y-axis. The market is initially in equilibrium where Se =
De with q quantity of euros being bought and sold at the price P. An increase in
inflationary pressure, increases imports for foreign products,
3. Low confidence -> less FDI -> sell = S right
4. High imports -> need other currrency -> sell to buy = S
5. High inflation -> more saving elsewhere -> sell
6. Confidence -> more investment -> buy = D
7. High forex -> more speculation -> buy Y = D
8. Lower confidence -> less investment -> sell = S
Consequences of
a change in the
exchange rate
Appreciation consequences on M2 objectives
Price of J’ exports(i.e stronger currency); more expensive
(for foreigners)
less q.d
Price of J’imports; cheaper (for J*)
+ Manufacturers
S-tronger
P- pound
I- importers
C- cheaper
E- exports
D- dearer
Fixed ER
systems
+ peg
ged
er
central bank intervention to i^/d^ demand/supply
** Fixed ER system; the value of a currency is “pegged” to
1.the value of another currency
2. The average value of a selection of other currencies (uncommon)
3. The value of a commodity (Gold, uncommon)
RLE: Barbados dollar is fixed at B$1 = US$0.5 (stability & confidence to B.
Economy with a key ER/trade partner)
Consequences of fixed ER system (best for LEDCs with fluctuating & volatile
ER vs stable currencies pegged to)
● Px & Pm remain stable .:. High confidence = FDI investment = econ growth
● Proportional appreciation/depreciation but .:. Encounter stability
● Lead to excess demand at the new fixed ER .:. Require further/continuous CB
intervention to ensure equilibrium remains at fixed ER otherwise pressures for
ER to change
Further intervention
● Increase D.B$ = IR increase, sell foreign exchange reserve
● Increase S.S$= IR decrease, foreign exchange reserves, for when
●
●
●
●
Changes in a fixed exchange rate (intentional central bank intervention)
revaluation & devaluation; increase & decrease respectively, the pegged
value of currency in a fixed exchange rate system
Problem 1: Excess demand of the currency
1.
2.
Increase supply of the currency by decreasing interest rates (savers sell
domestic currency to move money out of domestic banks)
Increase supply of the currency by buying more foreign currency (selling
domestic currency)
Problem 2: Excess supply of the currency e.g Nigeria, egypt (2016)
3.
4.
5.
Fixed vs Freely
Floating ER
●
1.the
Increase demand of the currency, by increasing interest rates (savers
demand domestic currency to move into domestic banks)
Increase demand of the currency, by selling foreign exchange reserves
(buying/demanding directly domestic currency)
Reduce supply? (To not affect interest rates & foreign exchange reserve
amount) =