3.1+International+Trade

This is a straight forward topic which looks in a simplistic way at the benefits of international trade. Read the relevant section of the textbook and make notes from this (P245-246 Dorton and Blink)
=HL extension: The Theories of Absolute and Comparative advantage.=

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Assumptions underlying the concept of comparative advantage

=Now read p 250-251 and make notes on the limits of specialisation= =What determines comparative advantage?= ====Comparative advantage is a dynamic concept. It can and does change over time. Some businesses find they have enjoyed a comparative advantage in one product for several years only to face increasing competition as rival producers from other countries enter their markets.====
 * ====Perfect occupational mobility of factors of production - resources used in one industry can be switched into another without any loss of efficiency====
 * ====Constant returns to scale (i.e. doubling the inputs in each country leads to a doubling of total output) (but dim returns/or economies of scale). But if businesses exploit increasing returns to scale (i.e. economies of scale) when they specialise, the potential gains from trade are much greater.====
 * ====No externalities arising from production and/or consumption (over specialization in tourism and Bali ??)====
 * ====Transportation costs are ignored (esp relevant for bulky items and fresh produce(so technically we may be better at producing fruit, or at least have a comparative advantage in this, but the benefits of trade may not be great due to excessive costs of transport and keeping product fresh) Also environmental impact of food transportation may need to be taken into account []====
 * ====Comparative advantage is fixed. In reality it is not. Thailand had an advantage in low cost textiles for many years, but then China overtook it. Vietnam looks like it may even be cheaper now than China and actually China is now out-sourcing some textile manufacturing to Vietnam and Pakistan. This change means that over specialization is risky as it may result in unemployment when comparative advantage is lost.====
 * ====The model does not allow for risk. Again over specialization, especially in the production of commodities is risky if say demand falls and so revenue also falls.====

For a country, the following factors are important in determining the relative costs of production:

 * ====The quantity and quality of factors of production available (e.g. the size and efficiency of the available labour force and the productivity of the existing stock of capital inputs). If an economy can improve the quality of its labour force and increase the stock of capital available it can expand the productive potential in industries in which it has an advantage.====
 * ====Investment in research & development (important in industries where patents give some firms significant market advantage====
 * ====Movements in the exchange rate. An appreciation of the exchange rate can cause exports from a country to increase in price. This makes them less competitive in international markets.====
 * ====Long-term rates of inflation compared to other countries. For example if average inflation in Country X is 4% whilst in Country Y it is 8% over a number of years, the goods and services produced by Country Y will become relatively more expensive over time. This worsens their competitiveness and causes a switch in comparative advantage.====
 * ====Import controls such as tariffs and quotas that can be used to create an artificial comparative advantage for a country's domestic producers- although most countries agree to abide by international trade agreements.====
 * ====Non-price competitiveness of producers (e.g. product design, reliability, quality of after-sales support)====

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=Comparative Advantage revisited: If you are still struggling with this topic have a look again at the key concepts in this video.= media type="file" key="Episode 34_ Comparative Advantage _ Trade.flv" width="580" height="580"

=Free trade and protectionism=

=In order to understand the implications of protectionism on the welfare of an economy you need first to understand the concepts of consumer and producer surplus=

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=Note that when you are looking at the implications of protectionism on welfare it is usually done in the context of tariffs. Here is a nice video that explains the main points= =media type="youtube" key="6OKVB1Otx8s" height="315" width="420"=

=The effects of quotas is a little more complex, but for those who are keen here is the analysis.=

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HL Quantitative work: Again HL students should be able to not only graphically show the effects of tariffs and quotas, but also to mathematically measure these effects. Attempt this example With free trade there are 1000 units of imports. The world price is 15$. Domestic firms supply 500 units. The Government imposes a tariff on imports of $5 (which increases the price to $20). This reduces imports to 500 units and domestic supply increases to 700.

Calculate the Government revenue from the tariff Calculate the loss of consumer surplus Calculate the gain in domestic producers surplus Calculate the net welfare loss



=**Protectionism Essay**=