International economics
International trade
Free trade refers to international trade that takes place without any trade barriers.
Benefits of trade
Efficient allocation of world resources
Specialization according to comparative advantage would allow firms who can produce a
good or service most efficiently trade with other countries, increasing their market size and
hence have a higher output leading to a higher standard of living in each country.
Internal economies of scale
Producing a larger number of goods due to the availability of a new market would reduce
cost of production for firms. The reduction in costs can be passed onto consumers who can
now enjoy lower prices.
Increased competition
Trade introduces foreign competition which forces firms to invest in research and
development. Firms will find a more efficient way to produce their goods, resulting in lower
costs, better quality products, benefiting consumers.
Greater choice
Trade allows consumers to purchase from foreign markets. The greater number of choices
results in a higher level of customer satisfaction.
Costs of trade
Free trade causes 2 main problems.
1. A country will be more vulnerable to sudden changes in demand.
A global slowdown or sudden loss of comparative advantage would cause large
scale structural unemployment and a significant fall in living standards.
2. Trade may give rise to unfair trade practises.
Eg: dumping
, Protectionism
Protectionism refers to the protection of home industries from foreign competition by the
government.
Tariffs
Tariff is a tax imposed on imported goods with the intention to reduce imports from
overseas.
In the short run, tariffs will
protect the few stakeholders.
In the long run the related
industries are affected and
domestic producers do not
become more efficient due to
absence of competition
International trade
Free trade refers to international trade that takes place without any trade barriers.
Benefits of trade
Efficient allocation of world resources
Specialization according to comparative advantage would allow firms who can produce a
good or service most efficiently trade with other countries, increasing their market size and
hence have a higher output leading to a higher standard of living in each country.
Internal economies of scale
Producing a larger number of goods due to the availability of a new market would reduce
cost of production for firms. The reduction in costs can be passed onto consumers who can
now enjoy lower prices.
Increased competition
Trade introduces foreign competition which forces firms to invest in research and
development. Firms will find a more efficient way to produce their goods, resulting in lower
costs, better quality products, benefiting consumers.
Greater choice
Trade allows consumers to purchase from foreign markets. The greater number of choices
results in a higher level of customer satisfaction.
Costs of trade
Free trade causes 2 main problems.
1. A country will be more vulnerable to sudden changes in demand.
A global slowdown or sudden loss of comparative advantage would cause large
scale structural unemployment and a significant fall in living standards.
2. Trade may give rise to unfair trade practises.
Eg: dumping
, Protectionism
Protectionism refers to the protection of home industries from foreign competition by the
government.
Tariffs
Tariff is a tax imposed on imported goods with the intention to reduce imports from
overseas.
In the short run, tariffs will
protect the few stakeholders.
In the long run the related
industries are affected and
domestic producers do not
become more efficient due to
absence of competition
