International Trade
Higher global output: The theory of comparative advantage = specialise according to comparative advantage and the trade - this leads to higher global output and so higher living standards.
Trade is an important source of economic growth: Access to a larger market so increasing exports
Higher levels of growth, lower U/P, higher standards of living
International trade promotes efficiency: Economies of scale from specialisation leads to falling LRAC. Increased competition keeps costs lower and therefore prices lower. This helps to control inflation and so improve standards of living.
Greater choice of goods and services: Consumers have access to more products (increases welfare)
Producers have access to the raw materials
Net welfare gain: There will be an increase in consumer surplus / net increase in economic welfare
Benefits of (Free) International Trade
Drawbacks of International Trade
Increased dependency: Specialisation leads to increased dependency on other countries, think gas
Over-reliance on a narrow range of products: Increased dependence a narrow range of products, ie, oil producing countries –when the price of oil falls their economies suffer, ie, Russia
Exposure to external shocks: Increased integration means economies are more exposed to external economic shocks
Short-term pain: The transition to an open economy can result in structural changes to economies in the short-term; some industries may expand and some may contract -these changes may result in structural unemployment
Long-term gain: The gains can take a long-time to materialise
Negative externalities: Increased pollution from higher output and transportation of goods
Changing comparative advantage / De-industrialisation
Joining/changing membership of trading blocs (the EU)
Economic development / growth of emerging economies
Trade Liberalisation
Globalisation
Resource Depletion
Reasons for changes in the
pattern of trade of UK
Main Aim -Trade Liberalisation(reduction in protectionist trade barriers) : In two ways
2.Settles trade disputes between members
1.Provides a forum for negotiation via a series of 'rounds'
WTO
Customs Unions: Free movement of goods and services within plus common external barriers
Custom Unions
Trade Creation: This is when economic integration results in higher cost domestic production being replaced by imports from a more efficient, lower cost source within the economically integrated area; trade is created.
Benefits of trade due to countries specialising according to their comparative advantage
Trade Diversion: This is when economic integration results in trade switching from a previously lower cost supplier from outside the union to a less efficient source within the union. The external tariff makes otherwise cheaper products from outside of the customs union more expensive -the result is a second-best outcome rather than an optimal outcome
Trade creation > Trade diversion ------> a net welfare gain
Winners and Losers: Different countries will experience different macroeconomic impacts
Timescale: There is likely to be a short-term impact on economies as they adjust -these couldbe resolved in the long term
Impact can change over time
Increased intra-CU trade is not as efficient as having world-wide free trade
Evaluation of Custom Unions
The Single European Market (SEM) is a core part of the EU
The SEM is a common (single) market and has 4 sacrosanct freedoms –free movement of:
Goods: Intra-EU trade of goods is 75% of total trade
Services: Intra-EU trade of services is 25% of total trade
Capital: The aim of free movement of capital is to encourage economic growth by enabling capital to be invested efficiently
Labour: EU citizens are free to live, study and work in any member state –this has created problems for the EU but mobility of labour is actually quite low
Single European Market