821017
IB Economics: International Trade
- Reason for Trade
- Gains
- Specialisation and
comparative advantage
- Increased choice
- Lowe costs/ prices
- Competition
- Economics of Scale
- Increased efficiency
in the allocation of
resources
- Source of foreign
exchange (import)
- Specialisation and
comparative advantage
- World Trade Organization (WTO)
- Deals with global "rules" for
trading, while aiming for
reduction in protectionism and
promotion of free trade
- Functionality
- Execute and administer agreements
- Provide a forum for trade negotiation
- Rule on trade disputes
- Monitor trade policies
- Provide assistance to ELDCs on trade issues
- Execute and administer agreements
- Deals with global "rules" for
trading, while aiming for
reduction in protectionism and
promotion of free trade
- Gains
- Free Trade/ Protectionism
- Free trade
- the international
exchange of goods and
services without any
artificial barriers to trade
- Comparative advantage
- Specialisation -> Efficiency use of resources
- Specialisation -> Efficiency use of resources
- Benefits to producers and consumers
- Lower costs and prices
- Lower costs and prices
- Decrease prices in importing
- Competitiveness and efficiency
- Market > Government
- No retaliation from barriers
- Allocation of resources
- the international
exchange of goods and
services without any
artificial barriers to trade
- Protectionism
- Infant industry arguments
- Underdeveloped economies
can't compete with Developed
economies
- Underdeveloped economies
can't compete with Developed
economies
- Anti-dumping
- Pricing below
cost to gain
competitiveness (subsidy)
- Pricing below
cost to gain
competitiveness (subsidy)
- Protecting employment
- Balance of Payments
- Positive current account
- Positive current account
- Externalities and demerit goods
- Education/ healthcare underprovision
- Education/ healthcare underprovision
- Strategic/ security reasons
- Unrealistic assumptions of comparative advantages
- Infant industry arguments
- Advantages of one
is disadvantage or
the other
- Quotas
- a physical limit on
imports in terms of
volume or value
- Similar effect as tariff
- Instead of government
revenue foreign importing
firms with quota license
- Buying goods at
world price and
selling for higher
- Buying goods at
world price and
selling for higher
- Global misallocation
- a physical limit on
imports in terms of
volume or value
- Quotas
- Tariff
- Tax on imports
- Boosts Domestic firms
- Raises Government revenue
- Effectiveness depends on
elasticities of D and S
- Deadweight welfare loss
- Global misallocation
- Tax on imports
- Subsidies
- artificially lower the costs
of producer thus reducing
price of G & S
- Less imports
more domestic
supply
- Negative effect on
government budget
- Global misallocation
- artificially lower the costs
of producer thus reducing
price of G & S
- Free trade
- Economics Integration
- Globalization
- the geographical dispersion of
industrial and service activities and the
cross-border networking of companies
- the geographical dispersion of
industrial and service activities and the
cross-border networking of companies
- Preferential trade agreement
- Bilateral (2) or Multilateral (many)
- Partner > low cost producers
- Bilateral (2) or Multilateral (many)
- Trading Blocs
- Free Trade Area
- When countries form a trading area
within which they move goods and
services freely but each individual
country retains its own barriers to
outside countries
- When countries form a trading area
within which they move goods and
services freely but each individual
country retains its own barriers to
outside countries
- Custom Union
- Individual country trade
barriers no longer exist and
there is a unified trade policy
- Individual country trade
barriers no longer exist and
there is a unified trade policy
- Common Market
- A customs union with the
free movement of factors of
production as well
- Reluctance to surrender
both economic and
political sovereignty stop
further intergration
- Reluctance to surrender
both economic and
political sovereignty stop
further intergration
- A customs union with the
free movement of factors of
production as well
- Free Trade Area
- Monetary Union
- a common market with
a common currency and
a common central bank
- Advantages
- More efficient
resource allocation
- Increased quality
of life/ real income
- Easier to trade
- Price transparency
- Coordinated macro policy
with lower inflation and
interest rates
- Increase inward investment
- Reduced Exchange
Rate uncertainty
between members
- More efficient
resource allocation
- Disadvantages
- Increased competitive costs
- Lower levels of integration,
firms exploit differences in
employment and
environmental legislation
- Loos of economic
sovereignty
(Monetary)
- "One size fits all"
monetary policy
- Asymmetric shocks
- Increased competitive costs
- a common market with
a common currency and
a common central bank
- Globalization
- Exchange Rates
- the price of one
currency in terms of
another
- Types of ER
- Floating
- Demand
- Demand for exports
- Inflows of investments
- Speculative buying
- Central Bank buying currency
- Demand for exports
- Supply
- Demand for imports
- Outflows of investments
- Speculative selling
- Central banks
selling currency
- Demand for imports
- Factors of Change
- Monetary
- Interest rates and investors
- Interest rates and investors
- Fiscal
- Investor confidence
- Investor confidence
- Growth
- AD on imports/ exports
- AD on imports/ exports
- Inflation
- Purchasing Power Parity Theory
- ER will adjust in
long run due to PPP
- ER will adjust in
long run due to PPP
- Purchasing Power Parity Theory
- Trade Balance
- Trade surplus ER rise,
Trade deficit ER fall
- Trade surplus ER rise,
Trade deficit ER fall
- Speculation
- Huge impact
- Huge impact
- Monetary
- Depreciates and
Appreciates
- Demand
- Managed
- Government intervention
- Set limit to achieve
macro objectives
- Set limit to achieve
macro objectives
- Government intervention
- Fixed
- Government intervention
- Use IR and Currency reserves
- Use IR and Currency reserves
- Devalues and
Revalues
- Government intervention
- Floating
- Common Currencies and Monetary Integration
- Adv. Float (Opposite for Dis. Fixed)
- No currency reserves
- Monetary policy free to
target domestic goals
- Automatic balance of
payments adjustment
- Reduced risk of speculation
- No currency reserves
- Adv. Fixed (Opposite for Dis. Float)
- Inflation discipline
- Certainty through
currency stability
increased trade
- Reduced costs of currency
hedging for firms
- Inflation discipline
- Strong currency
- Adv
- Reduced import costs
- Inflationary discipline
- Improvement in the terms of trade
- Increased real
purchasing power
abroad
- Reduced import costs
- Dis
- Increased import penetration
- Exports struggle to maintain competitiveness
- Reduces economics growth
- Asymmetrical effects on regions and sectors
- Increased import penetration
- Adv
- Adv. Float (Opposite for Dis. Fixed)
- the price of one
currency in terms of
another
- Balance of Payment
- An account of a country's
financial transaction with the
rest of the world
- Current Account
- the value of trade in
G&S and net
investment income
and transfers
- Balance of trade in G&S;
Income; Current transfer
- Current account deficit
- Export < Import
- Downward pressure on ER
- Long term risks
- Capital Flight (capital transfer over sea)
- Inflationary, might need IR rise
- Opportunity cost of debt funding
- Effects on credit rating
- Capital Flight (capital transfer over sea)
- Export < Import
- Current account surplus
- Export > Import
- Upward pressure on ER
- Long term risks
- Risks of protectionist measures for deficit countries
- Upward pressure on the currency
- Risks of protectionist measures for deficit countries
- Export > Import
- the value of trade in
G&S and net
investment income
and transfers
- Capital and financial account
- Capital flows (shares,
government debt and
foreign investment)
- Capital account:
Capital transfer;
Transactions in
non-produced,
non-financial assets
- Financial account:
Direct investment,
Portfolio investment,
Reserve assets
- Capital flows (shares,
government debt and
foreign investment)
- An account of a country's
financial transaction with the
rest of the world
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