Topic 2: The global economy
EDEXCEL IGCSE
ECONOMICS
2.2 International trade
4EC1
2.2 International trade: What we will learn
a) Advantages and disadvantages of free trade:
Lower prices, increased choice, increased quality.(important. This is what you need).
Increased market size. More countries and more consumers.
Overseas competition harms domestic businesses. This is the real problem.
Increasing employment opportunities BUT overseas competition could damage domestic job
opportunities.
b) Reasons for protection:
prevent dumping (define - go back to your subsidy diagrams and make sure you can clearly draw.)
protect employment (go back to your macro notes, what are the different types of employment).
protecting infant industries (define)
to gain tariff revenue (define). A tariff is a tax on imports making them more expensive.
protect consumers from unsafe / harmful / ethically not sound products (examples)
reducing current account deficits (go back to balance of payments)
retaliation - trade wars (give examples)
2.2 INTERNATIONAL TRADE
c) Methods of protection: Protecting domestic markets from overseas competition
tariffs (define)
quotas (define)
subsidies (define go back to your microeconomics notes )
advantages and disadvantages of each method of protection (check your notes)
supply and demand diagrams (tariffs, quotas (no new diagram) and subsidies)
d) Trading blocs: A group of countries that agree to free trade (no protection)
impact of trading blocs on member and non-member countries
examples of trading blocs.
e) Role of the World Trade Organization (WTO): (done previously and you checked their website)
f) Trade patterns of developed and developing countries. (Sectoral change, primary to secondary). Promotes
free trade across member countries.
What is meant by international
trade?
Exporting and importing - goods and services (define with examples)
Open and closed economies. We did this
The importance of trade to economies
Economies specialise and trade. Absolute and comparative advantage,
Creates choice, quality and lower prices.
Larger markets. Economies of scale.
Creates more jobs and leads to economic growth (draw the diagram)
It contributes to price stability (go back to inflation and the demand pull and cost push
diagrams) as import prices can be lower than domestic products.
HK specialises in services, importing agricultural and manufactured products, exporting
finance, education and financial / legal services.
Free trade
No restrictions on the flow of goods and services between countries
No government intervention (tariffs, quotas, subsidies)
Start a new page or section for the advantages and the
disadvantages of free trade.
Arguments for free trade
Specialisation - more efficient allocation of resources and lower unit costs.
Increased competition - choice, price and quality.
Encourages and rewards innovation
Job creation in imports and exports.
Economic growth - domestic and global (diagrams).
Any other ideas?
Arguments against free trade
Over-specialisation can occur.
if world demand falls, this can give an economy significant problems
Dumping can occur - sell their surpluses at very low prices.
This drives local producers out of the market
Environmental concerns from the production process and from transporting large
quantities of goods around the world is costly.
THE MAIN TYPE OF EXPORTS
The table shows the top 10 exports
from the UK by category for 2016.
In March 2017 exports reached an all-
time high of £50bn. Approximately
56% of exports are goods, 44%
services.
The UK exports a range of machinery
and vehicles, with nearly a quarter of
exports within this category.
THE MAIN TYPE OF IMPORTS
China’s Top 10
Imports
More to add: Advantages and
disadvantages of free trade
Lower prices and increased choice for consumers
Cheaper raw materials and finished products are bought in from abroad
Increases the range of products available
Lower input costs
Businesses can increase in size - enables benefit from economies of scale.
They can also access cheaper raw materials and finished products from abroad.
More
MORE TO to add: Advantages
ADD: ADVANTAGES andOF
AND DISADVANTAGES
disadvantages of freeFREE trade
TRADE
Wider markets for businesses - allows diversification (Economies of
scope).
Moving into different markets by adapting current products to local
markets
Operating in different geographical markets reduces the impact of
a recession in other markets, particularly its domestic market
Growth and new markets allows increased sales (don’t say profits
when its revenue)
This should lead to greater profits
Advantages and disadvantages of trade
Foreign competition harming domestic businesses
How will BREXIT affect UK Particularly low cost imports - textiles and electrical goods.
manufacturing
businesses?
Why don’t HK firms can compete in international markets by
offering low cost goods? Justify your answer
The consequences of International
global interdependence
Increasing unemployment
Structural unemployment can occur due to over-
specialisation. Go back to your unemployment notes.
Infant industries might struggle to compete with
established multinationals, thus creating local problems and
limited employment opportunities
Conclusion
Increasing unemployment
Structural unemployment can occur due to over-
specialisation. Go back to your unemployment notes.
Infant industries might struggle to compete with
established multinationals, thus creating local problems and
limited employment opportunities
You must read the
Chapter(s). We
wont be coming
back to this with
revision.
You must read the
Chapter(s). We
wont be coming
back to this with
revision.
We have covered
this as part of our
“International
Trade” teaching.
Protectionism
Protectionism - protect domestic industries by restricting trade with other
countries.
Link to Unemployment (protecting jobs) structural unemployment
PROTECTIONISM
Arguments in favour of protectionism include:
Prevent dumping
Over-production in developed countries released into
markets of developing nations undercuts domestic
prices
Protect employment
Protectionism helps to protect domestic jobs. Infant
industries allowed to grow.
ADV / DISADV - PROTECTIONISM
Gain tariff revenue (go back to tax diagrams)
Consumers face a higher price
However, domestic governments receive income from
imports
Protect consumers from unsafe products
Reducing current account deficits (go back to Balance
of Payments and Imports and exports + current account
deficits and surplus)
Placing restrictions on imports helps reduce a balance of
payments deficit on current account as imports fall
Retaliation
A Trade War - a country can respond to protectionist
measures placed on it by other countries
METHODS OF PROTECTION:
TARIFFS
Tariffs are taxes placed on imported goods that are not applied to domestic goods
They can reduce the demand for foreign goods and services
The Tariff raises the
price. Go backThistoleads to domestic consumers substituting UK goods for those from abroad
indirect taxes.
This leads to an improvement in the balance of payments on current account and more
employment
However, it restricts choice by increasing the price of goods from overseas
This leads to higher prices and inflationary pressure in the domestic market
The subsidy lowers
Retaliation may occur, reducing demand for UK goods
the price. Go back to
subsidy
METHODS OF PROTECTION: QUOTAS
A physical limit on the volume of imports.
As with tariffs, this should reduce imports and improve the balance of
payments
However, it restricts choice for HK consumers
Less supply leads to higher prices unless domestic firms can produce the
difference at the same price
Retaliation?
METHODS OF PROTECTION: SUBSIDIES
Subsidies are government payments to domestic businesses to help reduce production
costs and improve competitiveness
This increases the supply of goods and services in the domestic economy
This creates jobs in the UK
It gives a competitive advantage to UK businesses as it will lead to lower costs and
therefore prices
Who is right?
The complex case of This is seen as unfair by foreign competitors who might look for their government to
Bombardier. provide subsidies
It might lead to sanctions due to the unfair competition created
THE IMPACT OF TARIFFS AND QUOTAS
Price Domestic Supply
Before the tariff or quota is
imposed domestic supply is Q1
and domestic demand Q4, but
after the tariff or quota, domestic
supply extends to Q2, whilst
P1 World Price + Tariff demand contracts to Q3, so
imports have been reduced from
Q1-Q4 to Q2-Q3. This has
benefitted domestic producers,
P World Price who have increased supply from
Q1-Q2. Higher prices restrict
consumers’ ability to buy goods.
Q1 Q2 Q3 Q4 Quantity
THE IMPACT OF SUBSIDIES
.
S
The imposition of a subsidy will lead to a
decrease in the cost of supply for UK firms.
S with subsidy Lower costs lead to a shift in the supply
Price
Subsidy curve down and to the right.
Quantity supplied will increase by Q-Q1. P
will decrease from P to P1.
P
P1
This might be seen as unfair competition as
it is giving UK firms a competitive advantage
in international markets.
Q Q1
Quantity
TRADING BLOCS
A group of countries join together to reduce trade barriers.
Easier lower cost trade increases demand.
However, countries outside the trading bloc will face barriers to trade, making it more difficult for
firms to sell their product
A number of trade blocs:
European Union (EU)
NAFTA
ASEAN
Regional Trading Blocs
Intergovernmental agreement, often part of a regional agreement where barriers to trade (tariffs and others)
EXAMPLE - THE SINGLE EUROPEAN MARKET (SEM)
Free movement of goods and services
Free movement of people
People can move between countries and seek employment
How will BREXIT affect
UK manufacturing Attracts workers into the UK from EU countries where there are less opportunities
businesses?
Common Laws covering all members of the single
market.
Advantages and disadvantages of Trading blocs. / free trade
ADVANTAGES AND DISADVANTAGES OF FREE agreements.
TRADE
Check your notes.
AGREEMENTS
IMPACT OF TRADING BLOCS ON MEMBERS AND NONMEMBERS
Trade creation is when trade shifts as a result of membership of a trading bloc
from a high cost producer to a low cost producer
Trade diversion is when trade shifts as a result of membership of a trading bloc
from a low cost producer to a high cost producer
Members benefit from increased trade whilst non-members lose out.
THE EU
An economic and political union
28 member states (2017)
Established in 1993
Operates as a single market
Free movement of people, goods, services & capital
Euro was introduced in 1999
17 countries use the Euro (2017)
Approx. 7.3% of world population
THE SINGLE EUROPEAN MARKET
Benefits include:
Ease of trade between EU countries
Increased choice for consumers and competitions between businesses
Location decisions to operate within the EU
Larger pool of skilled and unskilled workers
Increased competition for jobs
More mixed society leading to wider choice of products and changing social
trends
ASEAN
The Association of Southeast Asian Nations (ASEAN) was founded in 1967
Its members are Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar
(Formerly Burma), the Philippines, Singapore, Thailand and Vietnam
Keep abreast of
developments at
ASEAN.
It is one of the fastest growing markets in the world and is a major producer of
manufactured products, many of which are exported to the US and European
countries
As it grows in size it looks to rival the EU and NAFTA in terms of economic power
ASEAN
If it was a single country ASEAN would be the fourth largest economy in the world
At 600m it has a bigger population than both the EU and North America. With real GDP
growth of over 5% over the years 2000-2013 it looks likely to become a significant
economic powerhouse
It is a diverse market with rich cultural differences and differences in GDP per capita,
with Singapore one of the richest countries in the world in terms of per capita income
As its economy continues to grow rapidly it will be able to compete effectively with the
EU and NAFTA
NAFTA
The North American Free Trade Association (NAFTA) was founded in 1994
It is a trilateral agreement between the USA, Canada and Mexico
Its aim is to eliminate any barriers to trade between the three countries
How will the UK leaving the The agreement led to significant FDI into Mexico, particularly from the USA
EU affect relations with
NAFTA? Often, production was transferred from the USA to Mexico, creating significant tension
amongst American workers
However, it is clear that NAFTA has led to significant growth since its introduction
ROLE OF THE WORLD TRADE
ORGANISATION (WTO)
The WTO’s mission
statement:
“The WTO is the
Have a look at the WTO website
international organisation
whose primary purpose is Purpose - promote free trade by persuading countries to abolish import tariffs
to open trade for the
benefit of all.” and other barriers.
The only international agency overseeing the rules of international trade
Settles trade disputes between governments and organises trade negotiations
WTO decisions are absolute and every member must abide by its rulings
160+ members
You must read the
Chapter(s). We
wont be coming
back to this with
revision.
You must read the
Chapter(s). We
wont be coming
back to this with
revision.
We have covered
this as part of our
“International
Trade” teaching.
ACTIONS BY THE WTO
The WTO seeks to reduce trade barriers in order to promote world trade.
Trading blocs might conflict with the WTO because they:
Distort trade by creating barriers
Negatively impact on non-members
Allocate resources in an inefficient manner
Lead to protectionist policies between trading blocs
Contravene a key requirement for WTO membership in that all members must have
MFN status
TRADE PATTERNS OF DEVELOPED AND DEVELOPING
COUNTRIES
Europe, Australasia, North America - seen a period of deindustrialisation occur
as the advantage in the production of many goods has shifted to China, India and
Asian nations.
Industry replaced with growth in the provision of financial services and other
tertiary markets such as education
Some of the developed economies experience a deficit on the balance of
payments current account in terms of goods, but a surplus in terms of services -
development of a high income economy in certain specialist fields such as
finance.
TRADE PATTERNS OF DEVELOPED AND DEVELOPING
COUNTRIES
Developed countries have used developing countries as a source of cheap production in
terms of lower costs of raw materials and labour
The improvement in production costs and lower inflationary pressure generated as a
consequence has improved the real incomes of consumers of developed countries and
boosted their standard of living
However, this has led to a decline of manufacturing in developed countries
Many developed countries have experienced structural unemployment as a
consequence of businesses relocating production to low wage economies
Developed countries have rapidly moved into the tertiary sector which provides higher
income employment
TRADE PATTERNS OF DEVELOPED AND DEVELOPING
COUNTRIES
Increased trade has enabled emerging economies to participate more effectively in the
global economy
Many have become more integrated into competitive markets and have generated
significant income and wealth for their citizens
This increased income and wealth has led to the creation of job opportunities, which can
assist in the reduction of poverty
However, many developing countries have found it hard to access large markets if they
are not members of that trading bloc
2.2 INTERNATIONAL TRADE - IN THIS UNIT YOU WILL
LEARN:
a) Advantages and disadvantages of free trade:
Lower prices, increased choice, increased quality.
Increased market size.
Overseas competition harms domestic businesses
Increasing employment opportunities BUT overseas competition could damage job opportunities.
b) Reasons for protection:
prevent dumping
protect employment
protecting infant industries
to gain tariff revenue
protect consumers from unsafe / harmful / ethically not sound products -
reducing current account deficits
retaliation - trade wars
2.2 INTERNATIONAL TRADE - IN THIS UNIT YOU WILL
LEARN:
c) Methods of protection:
tariffs (define)
quotas (define)
subsidies (define)
advantages and disadvantages of each method of protection (check your notes)
supply and demand diagrams (tariffs, quotas and subsidies)
d) Trading blocs:
impact of trading blocs on member and non-member countries
examples of trading blocs.
e) Role of the World Trade Organization (WTO): (done previously and you
checked their website)
f) Trade patterns of developed and developing countries
