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Maktab Sains Paduka Seri Begawan Sultan Economics Form 5 INTERNATIONAL TRADE International trade is the exchange of goods and services between countries. An import is the UK purchase of a good or service made overseas. An export is the sale of a UK- made good or services overseas. Advantages 1. Countries can obtain goods and services, which they cannot produce themselves 2. Countries can specialize 3. International trade makes mass production possible and therefore receive the benefits of economies of scale. x Competition from abroad encourages efficiently. Foreign Competition encourages firms to be efficient and to produce cheaper and better quality products. 5. Consumers benefits from the international trade as they get wider choice of goods and services. 6. Trade between countries leads to international peace and co-operation. [Absolute Advantage ___ Comparative Advantage |Where one producer is better at | Where one producer can produce a producing a product than other | good at a relatively cheaper cost in product. terms of other goods than another producers, Assume that the United Kingdom and United States both produce just two commodities, wheat and hi-fi Each country we assume will have 100 workers, half devoted to wheat production and another half to the production of hi-fi. The total output per year of both countries shown below, Fig 1 _ ABSOLUTE ADVANTAGE FIG 4. Hi-Fi produced by50 | | Wheat(tones) workers produced by 50 - workers United States “40 35 United Kingdom 50 30 Total Output | Perperiod | == 90S © In this example, the USA is better than UK at producing wheat. * That is, they have an absolute advantage over UK in the wheat production * When one country is producing a particular commodity compared with another it is said to have an absolute advantage. + However, the UK has an absolute advantage over the USA in the production of Hi-Fi, * Ifeach country specialized the USA would only produce wheat and the UK only Hi-Fi, Total output of both would rise as shown below. AFTER SPECIALISATION Hi-Fi produced by Wheat tones 100 workers produced by 100 (in UK only) workers _ - (in USA only) United States 0 70 United Kingdom 100_ 0 _ Total Output Per period 100 70. The example assumes that 100 workers can produce twice as much as 50 workers, that is, there are no diminishing returns to labour. If the UK now agrees to trade 40 Hi-Fi for 30 tonnes of wheat from the USA, each country after trade is better off. AFTER SPECIALISATION AND TRADE I Hi-Fi Wheat tones United States | 40 40 United Kingdom 60 30 Total output Per period i 100 | 70 COMPARATIVE ADVANTAGE It stil benefits countries to specialize and trade even if one does not have an absolute advantage in the production of a commodity. Look at the examples of Germany and Japan. We assume for simplicity that each country devotes half its 100 strong workforce to the production of cars and televisions. ears TELEVISIONS _ Japan 400 400 Germany __ a [Tota output. | | Per period fos! 560 Japan has an absolute advantages in both goods. However, in Japan they would only need to give up four televisions to produce one extra car in Germany only two televisions would have to be given to produce one extra car. So Germany is relatively better at producing cars than Japan. That is, Germany is less efficient than Japan in producing both goods, itis least inefficient in car production By concentrating on the production of cars, a country like Germany can export cars and imports other goods like televisions with their export earnings. Japan should, in our example, concentrate on the production of televisions. Both countries can gain from specialization and trade.