Ib Economics: International Trade

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International Trade

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The exchange of goods and services between countries.

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Why do countries trade?

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-Lower prices
-Greater Choice
-Differences in Resources
-Economies of Scale
-Increased Competition

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Free Trade

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takes place between countries where there are no barriers to trade put in place by governments or international organizations.

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sunset industry

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industry in decline.

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sunrise industry

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new or infant industry

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Dumping

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the selling by a country of large quantities of a commodity at a price lower than its production cost in another country--ruins domestic producers.

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Arguments for Protectionism

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-protecting domestic employment
-protection the economy from low cost labor
-protecting an infant industry
-to prevent dumping
-avoid risks of overspecialization
-strategic reasons
-to protect production standards
-raise government revenue
-correct a balance of payments deficit.

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Arguments against protectionism

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-Beggar-thy-neighbour
-less choices
-competition diminishes -- less incentive to lower prices
-distorts comparative advantage.

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Tariff

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A tax that is charged on imported goods.

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Subsidy

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an amount paid by the government to a firm, per unit of output.

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Quota

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physical limit on the numbers or value of goods that can be imported into a country.

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Voluntary Export Restraints

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agreements between exporting and importing countries in which the exporting country agrees to limit the quantity of exports of a specific good below a certain level.

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Health and Safety Standards

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may restrict import entry if it is lengthy to carry out proof that they are not violating these codes.

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Embargo

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an extreme quota or complete ban on imports and is usually put in place as a form of political punishment

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Nationalistic Campaigns

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governments will sometimes run marketing campaigns to encourage people to buy domestic instead of foreign goods.

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WTO

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World Trade Organization: an international organization that sets the rules for global trading and resolves disputs between its member countries.

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Aims of WTO

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-administer WTO agreements
-be a forum for trade negotiations
-handle trade disputes among member countries
-monitor national trade policies
-provide technical assistance and training for developing countries.
-cooperate with other international organizations

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Pro-WTO

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-promotes peace (diplomacy)
-disputes handled constructively
-rules make life easier.
-cuts cost of living for consumers
-provides more choice of products
-raises incomes and stimulates economic growth
-encourages good govt

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Anti-WTO

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-important decisions made between small groups of wealthier nations
-developing countries can't afford to go to all negotiations/have representatives
-WTOs includes long list of services that should be privatized
-Free trade does not lead the common man to be better off (rich get richer)
-WTO treaties biased towards MNCs and rich countries (allowed higher import duties and quotas in certain products, highly protected agriculture in developed countries)

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Globalization

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the increased integration of national economies into global, rather than national, markets prompted by liberalized cash flows, liberalized trade flows, significant advances in information technology, and marked decreases in the costs of international transport.

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Trading Bloc

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a group of countries that join together in some form of agreement in order to increase trade between themselves and to gain economic benefits from cooperation on some level.

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Preferential Trading Areas

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trading bloc that gives preferential access to certain products from certain countries

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Free Trade Areas

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a n agreement made between countries that agree to trade freely among themselves, but are allowed to trade with other countries if they wish.

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Customs Union

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agreement between countries, where the countries agree to trade freely among themselves, adopt common external barriers against any nations attempting to import into the union.

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Complete economic integration

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individual countries would have no control of economic policy full monetary union, and complete harmonization of fiscal policy.

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Exchange Rates

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the value of one currency expressed in terms of another currency

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Fixed exchange rate system

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an exchange rate regime where the value of the currency is fixed to the value of another currency by the govt's or central bank's buying or selling currencies when necessary.

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Floating Exchange Rate

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the value of a currency is allowed to be determined solely by demand for and supply of the currency on the foreign exchange market.

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What causes the value of a country's currency to increase?

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increase in demand for US goods and services, US inflation rates lower than GB inflation rates (makes their goods slightly less expensive), increase in EU incomes, change in tastes, US investment prospects improve, interest rates increase (save there), speculators think it will go up.

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What causes its value to decrease?

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americans increase demand for EU goods and services (US inflation higher--more expensive), incomes in US increase, change in tastes, eu investment prospects improve, rise in EU interest rates, speculation.

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Advantage of high exchange rate

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-downward pressure on inflation (high ER, price of finished imported goods will be low--reduces cost of production for firms --> lower prices for consumers)
-more imports can be bought= high ER= each unit of currency will buy more foreign currencies and thus more foreign goods.
-high value forces domestic producer sto improve efficiency--> high ER threatens international competitiveness

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Disadvantages of high exchange rate

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-damages import industries --> might be difficult to sell goods abroad = unemployment.
-damage to domestic industries--> more imports are purchased (less expensive).

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advantages of a low exchange rate:

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-greater employment in export industries.
-greater employment in domestic industries = makes imports more expensive -- encourages domestic consumers to buy domestic products.

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disadvantage of low exchange rate

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inflation --makes imported final goods more expensive.

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Government intervenes to:

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-lower exchange rate to increase employment
-raise exchange rate to fight inflation
-maintain fixed exchange rate
-avoid fluctuations
-achieve ER stability--improves business confidence.
-improve current account deficit.

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Balance of Payments

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a record of the value of all transactions between the residents of one country with the residents of all other countries in the world over a given period of time

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Current Account

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the measure of flow of funds from trade in goods and services, plus other income flows.

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Net Investment Incomes

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measure of the net monetary movement of profit, interest, and dividends moving into and out of the country over a given period of time as a result of financial investment abroad.

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Net transfers of money

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payments made between countries when no services or goods change hands.

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Capital Account

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a measure of the buying and selling of assets between countries

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Assets

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include anything that can be owned and has value (land, real estate, companies, stocks, shares, government bonds)

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Expenditure Switching Policies

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any policies implemented by the government that attempt to switch the expenditure of domestic consumers away from imports towards domestically produced goods and services

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Expenditure Reducing Policies

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any policies that reduce overall expenditure in the economy (AD-- left)