Economics Theme 4

Protectionism

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International Trade

Key Terms
Opportunity cost = sacrifice/gain
Terms of trade = (average price of exports/average price of imports) x 100

The buying and selling of goods from different countries from around the world

Absolute Advantage- Where one country can produce goods more efficiently than others because of factor endowment and/or the right climate

Comparative Advantage - Where one country can produce goods at a lower opportunity cost than another. Less resource sacrifices in production.

Strategies by which trade between countries is restricted by the government

Comparative advantage assumes that cost are constant and that only two economies are producing goods

Disadvantages to international trade

Overdependence
Especially prominent in LIC's
95% of Angola's export revenue comes from. So if the price of oil fluctuate so does Angola's GDP
Other countries determine your economic growth

Jobs
Trade has made the world more interconnected meaning firms can relocate much easier. This can leave people without jobs.
MNC's tend to exploit workers in countries with little to no health and safety regulations

Distribution of Income
Leads to income inequality
E.g. coffee bean farmers make $10 per kg but Costa "adds value" and make $100 per kg

The Environment
Can lead to environmental degradation

Loss of Culture
Trade brings foreign goods and services into a country that can dilute the native culture

Advantages to International Trade

Increased Competition for Domestic Suppliers
Greater pressure for lower prices and/or better quality products
Dilution of monopoly power

Helps create export-led growth

Dynamic Efficiency
Trade tends to speed up the pace of technological progress and innovation across different industries

Factors Influencing Terms of Trade

Inflation
Increases the cost of production resulting in a rise in export prices

Change in commodity price

Protectionist policies

Patterns of Trade

Countries with strong exchange rates tend to import more products than they export and vice versa

Emerging economies generally have lower production costs so they export more. They also have a large amount of people moving out of absolute poverty so demand for luxury goods rise

Trade Blocs

Organisations which consist of a group of countries who choose to trade with limited or no trade barriers

Free Trade Area
E.g. NAFTA (North American Free Trade Agreement)
Little or no tariffs and quotas

Customs Union
E.g. ASEAN ( Association of Southeast Asian Nations)
Same as above but with common external tariffs to non-member countries

Single Market or Common Market
E.g. The E.U
As above but with free movement of labour and capital. Similar labour, healthcare and agriculture legislation

Monetary Union
E.g. EuroZone or E.M.U (Economic Monetary Union)
As above but with a single currency, central bank and similar monetary and fiscal policy

Tariffs - Taxes imposed on goods and services imported into a country which reduces the quantity imported

Quotas - Quantitative limits or a cap on the level of imports allowed

Export Subsidies - A grant given by the government to encourage domestic production by lowering their cost of production by lowering their cost and increasing international competitiveness

Embargo - A total ban on imported goods or services from specified countries

Reduces imports because domestic consumers will switch to using the now cheaper domestic goods

Increases exports because of the more competitive price

Voluntary Export Restraint Arrangements - Where two countries make an agreement to limit the volume of exports to one another over a period of time

Import Licensing - A license or permit to import specific goods. Restricts import to only those permitted

Foreign Exchange Control - Limiting the amount of foreign currency that can move between countries by limiting how much foreign currency domestic firms can access.

Reasons for Protectionism

Protect domestic industries (e.g. South Korea and Samsung) and by extension protecting domestic jobs

Raise tax revenue (especially for developing countries)

Prevent dumping. (Dumping - Selling goods below domestic production cost to break into t hat market)

Impacts

Retaliation
Causes tax revenue to fall.
Trade wars may reduce FDI and cause capital flight
Exporting firms have lower demand