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Chp 15: Free Trade and Globalisation - Coggle Diagram
Chp 15: Free Trade and Globalisation
Theory of CA
CA: Can produce a good at a lower opportunity cost compared to another country
Assuming each country only has
10 units of resource, draw PPF
1 unit of resource can produce.........Ovens / Cloth
Country A : 10, 40
Country B : 2, 20
A has CA in ovens, B has CA in cloth
Favourable TOT: A trades 1 oven for 6 cloth from B
Both countries consume beyond PPF
Assumptions
Labour is homogeneous and perfectly
mobile within a country
Specialised labour cannot be re-deployed to other industries, need to protect the industry to prevent job loss
Labour is immobile between countries
Goods are homogeneous
Product differentiation leading to intra-industry trade (exporting and importing the same type of good)
No transport costs in trading
goods between countries
Transport costs reduce cost advantages
Constant returns to scale in production
Countries will produce goods with high potential
int EOS even though they do not have CA
No trade barriers
Protectionism
Mutually beneficial TOT
Relative abundance of agriculture drives down the prices -> Unfavourable TOT for the developing countries who specialise in agriculture
Dynamic CA: CA changing over time due to changes in factor endowments
Reasons for differing opp cost
Different resource endowments
Different technology
Different productivity
eg. low labour productivity means CA in production of low technology goods like cloth
Other benefits of trade
Economic growth
AD-AS diagram
Higher output lead to int EOS
Greater variety of goods
Increased competition
Productivity improvements, innovation
LRAC decrease
Patterns of trade
Supply Factors
Comparative Advantage
Countries trade with other countries with differing CA
Fragmentation of supply chain
Outsourcing: Shifting part of production process to an external party
Off-shoring: Shift part of production process to another country
eg SG produce semiconductors while labour abundant countries like Vietnam do the final assembly
Transport costs and location
Demand Factors
Consumer taste & preferences
Cater to demand for a wide range of the same type of good eg cars, phones
FTAs, protectionism
Changes in income
Consider YED of imports and exports
National interests (Strategic, security reasons)
Globalisation
Drivers
Technological innovations
Increase in output from exports leads to int EOS through technological changes (achieving MES)
Improvements in transportation
Economic policies
FTAs, eg ASEAN Free Trade Area
opening of capital markets facilitates FDI (flow of capital
integration in terms of financial flows, trade, movement of FOP, ideas and changes in information and technology
Benefits
Economic growth
If X increases more than M, actual growth. Reasons for M increasing: Continuing to set high tariffs (PEDm<1) and unfavourable TOT? Reasons for X increasing: PEDx>1, lower prices from lower tariffs
FDI leading to potential growth
Improved allocation of resources
Countries that need cheap labour/ skilled labour/ capital will get them
Expansion of markets lead to int EOS -> productive efficiency
Benefit of diversification of supply chain
Less vulnerable to import cost push inflation (SRAS)
Costs
Structural unemployment
temporary as economy transitions
workers retrenched from industries that lose CA may have job skill mismatch
Greater vulnerability to capital flows
hot money (due to higher interest rate) OR speculative money flows is bad, could lead to appreciation then through ML condition cause AD to decrease, worsen BOP
income inequality
firms outsourcing to other countries with lower cost of low skilled labour, so the wages of low skilled labour will stagnate
Protectionism
Tariff Barriers
Specific - fixed amt of tax per unit
Ad Valorem - certain % of the price
Non-Tariff Barriers
Import Quotas
Export Subsidies
Technical & Administrative Barriers
Voluntary Export Restraints
willing to limit the amount of exports to a certain country
Exchange control (eg to curb luxury goods)
Why should
Infant-industry argument
eg steel industry in India needed protection to gain int EOS
uncompetitive
Diversification for stability
for countries who specialise in one or two products and are reliant on the world market
goes against benefits of specialisation
Industrialisation and Increased Domestic Employment
reducing reliance on imports, protecting domestic jobs, consider AD, forcing foreign suppliers to set up production in the country instead
all countries are worse off after fighting with trade barriers
Protect BOP (prevent depletion of foreign exchange reserves)
does not solve root cause of BOP deficit eg lack of export competitiveness
Why should not
Higher prices, loss in welfare
draw tariff diagram
Lower global output and consumption
goes against specialisation
Greater inefficiency as the domestic firms gain greater market share due to reduced competition from imports
Purpose
Protect (X-M)
Protect BOP