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International trade - 3.1 - Coggle Diagram
International trade - 3.1
Benefits
Lower consumer prices
: increased competition and efficiency leads to lower prices.
Greater choice
: countries can import a larger variety of goods, of better quality than those produced themselves.
Ability for producers to benefit from EOS
: without trade the amount of output produced is limited by the size of the domestic market. If this is small the firm is unable to grow and take advantage of EOS. With trade the firm will be able to export to other countries expanding the size of the market, allow for them to produce more output, achieve EOS and enjoy lower costs and lower prices for consumers.
Ability to acquire needed resources
: resources that cannot be produced domestically and may be needed in the production process.
Efficient allocation of resources
: there are no restrictions on trade hence the allocation of resources is more efficient.
Increased competition
: As foreign firms are in the market domestic firms must try to produce at the lowest possible cost to be economically efficient = attractive to consumers.
Source of foreign exchange
: when selling goods abroad the host country will acquire foreign exchange along them to make payments to other countries for the goods imported.
Comparative advantage
If country specialize in trade according to their competitive advantage, global production and consumption will increase due to the improvements in global allocation of resources.
A country has a comparative advantage in contrast with another when a good can be produced at a lower opportunity cost. Countries will be able to consume outside of their PPC.
Absolute advantage
The ability of a country to produce a good using fewer resources than another.
According to the theory, if countries specialise in and export the good with the absolute advantage the country will produced and consume more
WTO
Provides the institutional framework for international trading system.
Administers WTO trade agreements, provides a forum for trade negotiations, handles trade disputes and monitors national trade policies.
Trade protection
Tariff
Taxes on imported goods to either protect domestic industries or provide a source of gov revenue.
Domestic Qs increases, imports decrease, Qd decreases
Domestic consumers are worse off = pay a higher price at Pw+t
Domestic producers are better off = received a higher price at Pw+t and sell a larger Q
Domestic employment :arrow_up:
Government are better off = act as a source of revenue
:arrow_up: inefficiency in distribution of income = a regressive tax
:arrow_up: inefficiency in production = increase production by producers with a comparative disadvantage (inefficient causing the initial higher Pd than Pw).
Global misallocation of resources = decrease in consumption and increased inefficiency
Quota
Legal limit to the quantity of a good imported
S curve shifts to the right by the amount of the quota.
:arrow_up: Qs, :arrow_down: Qd and imports
Domestic consumers are worse off = pay a higher p at Pqand purchase a smaller Q
Domestic producers are better off = receive a higher price Pq, sell a larger Q
Domestic employment increases
Domestic income distribution worsens = increase in P has the same effect as a regressive tax.
SAME IMPACTS AS TARIFF
Subsidy
Payments per unit output granted by the gov to domestic firms that compete with imports.
Domestic shifts rightwards by amount fo the subsidy and the good continues to sell at Pw
Domestic producers are better off = receive Pw + subsidy and production increases
Subsidy per unit is paid by the government = negative effects on gov budget
Taxpayers are worse off = portion of tax revenue is spent on the subsidy = opportunity cost
:arrow_up: inefficiency in production = production by domestic inefficient producers increases.
ADV = subsidies do not affect consumption whilst both others do.
Specialisation
When production is concentrated on one/a few goods
A country that doesn't trade has to produce all of its g's and s's hence doesn't specialise.
Free trade
The absence of any kind of government intervention in the international market. Trade takes place without restrictions
According to the theory of comparative advantage, free trade leads to a better allocation of global resources and maximisation of global output.
Whereas trade protection occurs when the government intervenes in the international market by imposing trade restrictions/barriers to prevent a free entry of imports into a country or to protect the domestic economy from foreign competition
Whether a country should export/import a good depends on the domestic price v the world price of the good.