BIG PICTURE

5. International 1. International Trade  International Economics

economics 1.1 Gains from trade
1.2 Barriers on free trade i. International Trade
1.3 Arguments for protectionism
ii. Gains from international trade
2. Balance of Payment - Benefits of specialization
2.1 Structure of balance of payment - Benefits of economies of scale
2.2 Corrections of Balance of Payment Deficit - Larger market
- Increased competition
- More and improved choices
- Transfer of technology and economic growth
- Promote beneficial relationship among countries

iii. Barrier/Restrictions to free trade

- Tariffs
- Import quotas
- Embargoes
- Voluntary Export Restrictions (VERs)
- Foreign Exchange (FOREX) controls

iv. Arguments for protection

- Infant-industry argument
- Employment argument
- National security argument
- Cheap foreign labour argument
- Antidumping argument

v. Balance of payments

vi. Structure of balance of payments

- Current account

vii. Capital and financial account

- Capital account
- Financial account

viii. Effects of balance of payment deficit

- Lower economic growth
- Increased indebtedness
- Depletion of official reserves
- Contractionary effects
- Devaluation of domestic currency

ix. Methods to reduce balance of payments deficit

- Stimulate exports and reuce imports
- Reduce aggregate demand
- Attract short-term capital inflows
- Reduce inflation
- Exchange rates
- Demand for foreign currency
- Foreign exchange market equilibrium
- Types of exchange rates
- Fixed (pegged) exchange rates
- advantages of fixed exchange rates
- disadvantages of flexible exchange rates
- Flexible/floating exchange rates
- advantages of fixed exchange rates
- disadvantages of flexible exchange rates
- Managed float
 NOTES FROM STUDY GUIDE

Gains from trade 1. Theory of comparative advantage TRIEITMT

This explains that by specializing in goods where countries have a lower opportunity cost, there can
be an increase in economic welfare for all countries TERASA
INDAH
2. Reducing tariff barriers leads to trade creations ENAK
Trade creation occurs when consumption switches from high cost producers to low cost producers. IKHLAS
TANPA
3. Increased exports MAKANAN
As well as benefit for consumers importing goods, firms exporting gods where the UK has a TAMBAHAN
comparative advantage will also see a big improvement in economic welfare. Lower tariffs on UK
exports will enable a higher quantity of exports boosting UK jobs and economic growth.

4. Economies of scale
If countries can specialize in certain goods, they can benefit from economies of scale and lower
average costs, this is especially true in industries with high fixed costs or that require high levels of
investment. The benefits of economies of scale will ultimately lead to lower prices for consumers.

5. Increased competition
With more trade, domestic firms will face more competition from abroad. Therefore there will be
more incentives to cut costs and increase efficiency. It may prevent domestic monopolies from
charging too high prices.

6. Trade is an engine for growth

World trade has increased by an average of 7 % since the 1945, causing this to be one of the big
contributors to economic growth.

7. Make use of surplus raw materials

Middle Eastern countries such as Qatar are very rich in reserves of oil but without trade there would
be not much benefit in having so much oil. Japan, on the other hand, has very few raw material.
Without trade, it would be very poor.

8. Tariffs may encourage inefficiency

If an economy protects its domestic industry by increasing tariffs, industries may not have any
incentives to cut costs.
Barriers on free trade Despite the advantages of free trade, countries may wish to restrict import for various reasons.
This can be done through different methods:

1. Tariffs
This is a tax on imports

2. Quotas
This is a physical limits on the quantity of imports

3. Embargoes
This is a total ban on goods. It may be done to stop dangerous substances.

4. Subsidies common
If a government subsidises production, this gives them an unfair advantage over competitors. This is
quite common.

5. Administrative barriers

Arguments for 1. Infant industry argument

protectionism If developing countries have industries that are relatively new, then at that moment these industry’s
would struggle against international competition.
However, if they invested in the future, (wait for the industry to mature) they may be able to gain
comparative advantage

This shows that comparative advantage can change over time.

Therefore protection would allow them to progress and gain experience to enable them to compete
in the future.

2. The senile industry argument

If industries are declining and inefficient, they may require large investment to make them efficient
again.
Protection for these industries would act as an incentive for firms to invest and reinvent themselves.
However, protectionism could also be an excuse for protecting inefficient firm.

3. To diversify the economy

Many developing countries rely on producing primary products in which they currently have a
comparative advantage.
However, relying on agricultural products has several disadvantages:
- Prices can fluctuate due to environmental factors
 - Goods have a low income elasticity of demand. Therefore with economic growth,
demand will only increase a little.

4. Raise revenue for the government

Import taxes can be used to raise money for the government. However, this will only be a small
amount of money.

5. Help the balance of payments

Reducing imports can help the current account.
However, in the long term, this is likely to lead to retaliation. So in order to avoid retaliation, imports
must be allowed to continue.

6. Cultural identity
This is not really an economic argument but more political and cultural..
Many countries with to protect their countries from what they see as an Americanisation or
commercialization of their countries.
(WHAAAATTT?????P APA KAITAAAAAAN????)

7. PROTECTION AGAINST DUMPING

The EU sold a lot of its food surplus from the CAP at very low prices on the world market.
This caused problems for world farmers because they saw a big fall in their market prices.

8. Environmental
It is argued that free trade can harm the environment because LDC may use up natural reserves of
raw materials to export.
Also, countries with strict pollution controls mayfind consumers import the gods from other countries
where legislation is lax and pollution is allowed.

However, supporters of free trade would argue that it is up to individual countries to create
environmental legislation.