4.4+The+role+of+international+trade

Read P367-370 and make notes on these specific factors.
One confusing issue that may require further explanation is the fact that many LEDCs have "non-convertible" currencies. This means that they are not generally acceptable on FOREX markets and therefore not acceptable as a means of payment for international trade. This is obviously a barrier to trade.

Export promotion (Free Trade)
Export promotion is policy adapted by countries for growth through trade, and is associated with Asian NIC ‘tiger economies’ such as S Korea. But did crash of 97 mean that these policies do not work? The successes of export promotion policies are affected by world trade condition. **Possible problems are:**
 * Also benefits of free trade such as **
 * Exposing domestic industries to world-class competition results in efficiency, high productivity and low unit costs
 * Absolute and Comparative advantage (HL only)
 * Specialisation and economies of scale
 * Transfers of technology and benefits from inward investment etc
 * Over specialization (and therefore export diversification is often a strategy)
 * You may have an advantage now and specialize but this advantage is dynamic and you may lose it. Thailand cannot export low cost goods to world anymore it doesn’t have an advantage-China can beat it on prices
 *  Also strategic reasons for not over dependence on trade.
 * Finally consider that globalisation and trade result in issues of sustainability due to the carbon footprint of transportation. Have a look at the video below:

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 * <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Volatile commodity prices


 * **<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px; line-height: 1.5;">Terms of Trade (HL EXTENSION TOPIC) **

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**Terms of trade** is an index that shows the value of a country’s average export prices relative to their average import prices. It is calculated with the following formula:


 * Terms of trade= Weighted index of export prices/weighted index of import prices **

The indices of export and import prices are weighted to reflect the relative importance of different goods and services to the country’s export revenues and import expenditures.

A deterioration in the ToT means that exports are becoming cheaper relative to import prices over time.

Terms of Trade of LEDCs are deteriorating as these countries export commodities and agriculture for their export revenue. However there has been a long run downward trend in commodity prices for many years caused by a number of factors such as the improvement of technology, machinery, and better efficiency. (increase in Supply) With the demand for primary products being price inelastic, any increase in supply will have a greater depressing effect on prices.
 * <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Export Prices and LEDCs **


 * <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Student Activity: Show the above on a diagram **

Commodities have a low income elasticity of demand and therefore whilst demand has increased it has only increased by a small amount relative to the increases in supply.


 * <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px; line-height: 1.5;">Import Prices and LEDCs **

LEDCs tend to import manufactured goods that have a higher positive income elasticity of demand so as world income increases demand-side factors increase the price of manufactured goods faster than primary products.

A deterioration in the terms of trade is bad for LEDCs due to price inelastic demand for both imports and exports. This results in balance of payments deficit in the current account as LEDCs continue to buy expensive imports and gain less revenue for their exports.


 * Summary: Deterioration in LEDC’s Terms of Trade (with graphs) : **


 * LEDCs usually import services (wants) and export commodities (needs)
 * Economic growth worldwide= income increases= demand for goods and services (esp. luxuries) increases
 * Income elasticity of demand for luxuries is elastic since it takes up a big proportion of income
 * More economic growth in LEDCs= more demand for imports of services
 * Increase in demand (D --> D1) = increase in price of services (Pe --> Pe1) = more income for the foreign exporters (shaded blue)




 * In return, LEDCs will supply and export commodities to the foreign countries
 * However, income elasticity of demand for commodities are inelastic since they take up a small proportion of the income
 * Therefore, increase in supply for commodities (S--> S1) = small increase in price (Pe--> Pe1) and small increase in quantity demanded (Qd--> Qd1)= very little increase in income for exporting LEDC firms (red)

=<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Import Substitution (Protectionism) =

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Import substitution is a government industrialisation policy for growth by replacing imports with domestic production. Involves protectionism. e.g. tariffs & quotas to protect infant industries. <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">However protecting domestic industries from world-class competitors results in inefficiency, low productivity and high unit costs. Consumers pay higher prices and suffer a loss of consumer surplus. Argument for import substitution often rest on “Infant industry” argument

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">How it usually works:

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">• Stage 1 Identify labour intensive domestic industries currently met by imports eg textiles, clothes & shoes <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">• Stage 2 import the capital and intermediate goods needed to produce labour intensive, low capital goods. <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">• Stage 3 Protect these infant industries with tariffs and quotas. Domestic output begins to replace imports. <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">• Stage 4 Begin exporting. (at this stage protectionism would be reduced or stopped altogether)

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">In reality inefficient industries often remain inefficient. However the Chinese policy on Cars may be a good example. It now has its own reasonably competitive car industry. It is somewhere in stage 3.

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Explain tariff and quotas using relevant diagrams

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 * <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px; line-height: 1.5;">The WTO Trade Liberalisation and Development. **
 * <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">We looked at this topic when we looked at International Trade. Here is the link **

=<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">EXTENSION READING <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 12px;"> (NOT PART OF THE SYLLABUS BUT STILL INTERESTING) <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Fairtrade: =