Economics - 4.1.2, 4.1.3, 4.1.4 - Trade - A Level

Measurement of terms of trade

(Index of export prices / Index of import prices) * 100

Detriments to international trade on diagram

- Lost domestic production (QUK → Q1) may lead to job losses, which may increase unemployment, especially if it is a large domestic industry affected. - Imports (Q1Q2) lead to a rise in imports in AD, and also have negative (subtractive) impact on the current account balance. Since the UK is operating on a current account deficit, any import increase will lead to an increase in the current account deficit for the UK.

Changes in world economy since WWII

- The emergence of regional trading blocs - Many advanced economies have experienced deindustrialisation, with less national output generated by their manufacturing sectors. - UK is a good net exporter of services and net importer and goods because the economy has changed from being primary and secondary sector producer, to a more tertiary sector economy. - The 'collapse' of communism led to the opening-up of many former-communist countries (e.g. Russia and China) wiht low costs i.e. wages - Newly industrialised countries like India and China have dramatically increased their share of world trade and their share of manufacturing exports

Benefits to international trade on diagram

- a rise in consumer surplus links to rise material standards of living in affected economy if it affects - a significant enough number of consumers within the population. - the net welfare gain (c+d) in the diagram is viewed as a positive by Economists. It is the equivalent of the opposite of a deadweight loss (welfare loss) in externality diagrams.

Benefits to international trade

- lower prices - greater choice - differences in resource and factor endowments - economies of scale - increased competition - more efficient allocation of resources - sources of foreign exchange - monetising surplus commodities - political reasons - technology imports - export-led growth/multiplier - employment creation - transfer of ideas

Assumptions (evaluation) of terms of trade theory

-Only 2 countries and 2 goods. - No transportation costs - Assumes free trade - Switching factor resources from one industry to another involves no loss of efficiency. - No externalities from production and/or consumption - CA measures static advantage but not any dynamic advantage - Constant returns to scale. Increased specialisation may lead to diseconomies of scale. - Free trade is not necessarily "fair" trade - ie the rich countries might exert monopsony power to force producers in developing countries to accept lower prices.

WTO trade stats

According to the World Trade Organization 16 trillion USD of merchandise and 4.7 trillion USD of commercial services were trade globally in 2015.

Growth in international trade

Although subject to short term fluctuations as a result of the economic cycle, the value of trade has continued to grow, reflecting the increased significance of trade and globalisation. The charts below show that, as a percentage of world GDP, trade increased from 40% in 1990 to 60% in 2014. The effects of the financial crisis and subsequent recession can also be seen, as world trade fell as a percentage of GDP between 2008 and 2010.

Economic theory on international trade

Economic theory maintains that International trade helps raise living standards and results in higher levels of output and incomes.

Comparative advantage and terms of trade

For trade to be beneficial, the terms of trade (the ratio of exchange of Palm Oil for TVs in our example) must lie between the opportunity cost ratios.

'North-South' Trade

International trade between MEDCs and LEDCs. The 'North' and 'South' concepts refer to the Brandt Line separating the more developed from the less developed economies of the world. Note of course that there can also be 'North-North' and 'South-South' trade.

Inter-industry trade

International trade between two economies where products of one industry, or economic sector, are flowing in one direction, whilst products of a different industry, or sector, are flowing in the opposite direction. E.g. textiles exported from China to U.K. whilst legal consultancy services are exported from U.K. to China.

Intra-industry trade

International trade between two economies where products of the same industry, or economic sector, are flowing in both directions. E.g. Mercedes and BMW cars exported from Germany to U.S.A. whilst Ford and General Motors cars are exported from U.S.A. to Germany.

Inter-regional trade

International trade between two economies which are located in different general geographical region. E.g. trade between Germany and China - in different continents and also members of different trading blocs and political ideologies.

Intra-regional trade

International trade between two economies which are located in the same general geographical region (especially a geographical region defined by political connections as well as physical proximity). E.g. trade between Germany and Italy - both within Europe, and also members of the EU and Eurozones.

Trade openness

The ratio of trade to GDP, an indicator of trade 'openness' - has increased for most trading nations, and is a result of globalisation.

Patterns of trade

The types of products which are being exchanged in flows of trade between producers and consumers in different countries, and also the nature of the countries of origin and destination in terms of their respective geographical location and levels of economic development.

International trade diagram

We choose an example of a market to use for this. For example, here we may choose to discuss Smartphones bought and sold in the UK. Make sure to title your diagram to make it clear why a Micro diagram is being used in Macro.

Specialisation of countries

a country should specialise in the product which carries in the lowest relative opportunity cost compared to the other country, as it represents a comparative advantage about the other country.

Absolute advantage

the ability to produce a good or service more efficiently than another country (e.g. by using fewer resources than another country).

Terms of Trade

the amount of each product which is exchanged for the other product

International trade

the exchange of goods and services between producers and consumers in different nations

Comparative advantage

the situation where one country has a lower opportunity cost (i.e. relative cost) in the production of a good than another country. It can often be mutually beneficial for countries to change, even if one country has an absolute advantage in both products. This means a country can produce a good relatively cheaper (in terms of sacrificed output of other products) than other countries.