International Trade - economics notes PDF

Preview

Summary

ECONOMICSINTERNATIONAL TRADEOBJECTIVES•Define the term “international trade”•Explain the terms and concepts associated with international trade •Explain the rationale for international trade •Describe the primary factors that influence the level of international trade •Explain the concept of gains f...

Description

ECONOMICS INTERNATIONAL TRADE OBJECTIVES •Define the term “international trade” •Explain the terms and concepts associated with international trade •Explain the rationale for international trade •Describe the primary factors that influence the level of international trade •Explain the concept of gains from trade •Explain the concept of terms of trade What is International Trade? International trade is the exchange of capital, goods, and services across international borders or territories. Rationale for International Trade Reason for Trade #1: Differences in Technology Advantageous trade can occur between countries if the countries differ in their technological abilities to produce goods and services. Reason for Trade #2: Differences in Resource Endowments Advantageous trade can occur between countries if the countries differ in the natural resources available (minerals, farmland, etc.). Reason for Trade #3 It makes sense for each country to specialize in a product/products that it is good at producing, trade this and then purchase what it cannot produce. Such specialization leads to increased output. Reason for Trade #4: To gain economies of scale With specialisation and production on a larger scale than may be possible domestically, a country may be able to gain more economies of scale. This will lead to lower average costs and benefit consumers through lower prices. Advantages of International Trade Comparative Advantage- It allows countries to specialize in producing only those goods and services, which it is good at.

Economies of Scale- If a country wants to sell its goods in the international market, it will have to produce more than what is needed to meet the domestic demand. So, producing higher volume leads to economies of scale, meaning the cost of producing each item is reduced. Wider Range of Commodities: International trade makes it possible for each country to enjoy wider range of commodities than what is otherwise open to it. Promotes Competition: International trade promotes competition among different countries. The producers in home country, being afraid of the foreign competition, keep the prices of their products at reasonable level. More Job Creation: Increase in international trade also creates job opportunities in both countries. That’s a major reason why big trading nations like the US, Japan, and South Korea have lower unemployment rates. Disadvantages of International Trade If no restrictions are placed on the foreign trade, it may ruin the domestic industries and cause widespread distress among the people. In order to earn present export advantages a country may exploit her limited natural resources beyond proper limits. This may lead to exhaustion of essential material resources like iron, coal, oil, etc. The future generation thus stands at a disadvantage. Countries or companies involved in the foreign trade are vulnerable to global events. An unfavourable event may impact the demand of the product, and could even lead to job losses. For instance, the recent US-China trade war is adversely affecting the Chinese export industry. Factors that Influence International Trade (imports)      

Domestic income levels The exchange rate Domestic product prices vs. foreign product prices Quality of domestic goods Information, the mass media and changing tastes of consumers The goods produced in the country, together with the tastes of the consumers

Factors that Influence International Trade (exports)     

Foreign income levels The exchange rate Domestic product prices vs. foreign product prices Quality of imported goods Information and changing tastes of consumers in the rest of the world...