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Economics Unit 3: Trade
INTERNATIONAL TRADE AND PROTECTIONISM
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1: Benefits of Trade
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Voluntary Trade is mutually beneficial
International Trade​: buying and selling of goods across a border
Exports​: Selling of goods and services outside the country
Imports​: Buying of goods and services outside the country

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To counteract relative domestic tax difference:​ VAT countries have an advantage over non-VAT countries, as the tax
burden falls on producers in non-VAT countries
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Prevents dumping of foreign goods:​ dumping (exporting at a lower price than the average costs) destroys competition,
which allows prices to be raised in the LR
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Over-specialisation could be a problem
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To protect strategic industries:​ usually military/defense, does not make them rely on another country
Improve terms of trade:​ countries might place a tariff to lower demand for the product, lowering overall price

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6 Arguments against protectionism (MERCH)
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Misallocation of resources:​ sunset industries get worker and capital that they would not in free trade, which could be
used in industries with growing comparative advantage: misallocation
Escalation to a trade war:​ trade can stop and economic growth is implemented
Reduced export competitiveness:​ producers can allow themselves to be inefficient, due to less competition, which leads
to them being uncompetitive when returning to the global market; this makes them dependent of the tariff/subsidy
Corruption magnet:​ larger industries can bribe lawmakers to enact laws to help them further
Higher import costs:​ Drives up prices and possibly lowers quality of
products on the market

Movement from a closed economy to free trade:
Domestic production stops at Q1
Q1 to Q2 are imports by foreign producers
Free trade aids consumer and punishes inefficient producers who
supply above Sworld
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7 Types of Protectionism
TARIFFS
Tariffs:​ taxes that are charged on imported goods (Supply shifts left/back)
Domestic Producers:
Used to be only ​g, ​now ​a, b, c, g, h
Foreign Producers:
Used to be ​h, i, j, k​, now ​i, j​, due to Demand
falling from Q2 to Q4
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spending
■ Contractionary Monetary Policy such as raising IR to reduce overall spending
○ Expansionary supply side policies: ​increase competitiveness of domestic producers
■ Investments in education and healthcare to create a more skilled workforce
■ Funding for scientific research due to patents only being enjoyed by 1 country
■ Infrastructure lowers cost of production allowing for more exports
Benefits of reducing a current account deficit
○ Stronger currency

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Price stability
Low interest rates
Less taxpayer money paid for foreign interest on the debts

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5 Current account surplus
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Selling more goods to the rest of the world than a nation consumes in imports results in a current account surplus
Effect on the Exchange Rate
○ Demand will increase, leading to appreciation, which is added to by low Supply
○ → Government intervenes to stop appreciation, instead pegging it to the USD, so that more goods will be
bought continuously (China)
Effect on Domestic Consumption and Saving
○ Domestic households consume less than foreign households, leading to current account surplus → country
consumes less than it produces, which means that much money is spent on financial/real assets

Evaluating the Global Trade Imbalance
Continued decline in the second and tertiary sectors in the west
Western countries outsource jobs, moving manufacturing into cheap countries which can be argued has
destroyed a strong middle class
Persisting poverty in the developing world
Trade surplus should lead to economic growth, but reinvestments into the financial account stop currency
from appreciating → imports to China would force the export industry to be more competitive, thus raising
the standard of living
Threat to Economic sovereignty
Financial Account surplus; more foreign ownership of domestic assets, which means factories and national
debt is in the hand of foreign investors
Build up of the USD in asian central banks → if they were to flood the market, the USD would be very weak,
and they would be unable to buy all of their imports

ECONOMIC INTEGRATION
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1: Forms of Economic Integration
More open trade through trade agreements, which reduce barriers to trade and start to integrate the economies
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e

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