The Atlas of Economic Complexity (MIT)
Economic Centre of Gravity (Quah 2011)
An Introduction to International Trade
The world Biggest Economies (CNN Money)Globalisation and the Surfboard Industry (PBS Newshour)
The Big Mac Index (The Economist )
Lesson Support
The Benefits of Trade
Explain
that gains from trade include lower prices for consumers, greater choice for
consumers, the ability of producers to benefit from economies of scale, the
ability to acquire needed resources, a more efficient allocation of resources,
increased competition, and a source of foreign exchange.
Trade Introduction
Trade Introduction
Data from World Bank
Benefits of Trade HL Extension
Absolute and Comparative Advantage - Higher Level Only
• Explain the theory of absolute advantage.
• Explain, using a diagram, the gains from trade arising from a country’s absolute advantage in the production of a good.
• Explain the theory of comparative advantage.
• Describe the sources of comparative advantage, including the differences between countries in factor endowments and the levels of technology.
• Draw a diagram to show comparative advantage.
• Calculate opportunity costs from a set of data in order to identify comparative advantage.
• Draw a diagram to illustrate comparative advantage from a set of data.
• Discuss the real-world relevance and limitations of the theory of comparative advantage, considering factors including the assumptions on which it rests, and the costs and benefits of specialization (a full discussion must take into account arguments in favour and against free trade and protection—see below).
• Explain, using a diagram, the gains from trade arising from a country’s absolute advantage in the production of a good.
• Explain the theory of comparative advantage.
• Describe the sources of comparative advantage, including the differences between countries in factor endowments and the levels of technology.
• Draw a diagram to show comparative advantage.
• Calculate opportunity costs from a set of data in order to identify comparative advantage.
• Draw a diagram to illustrate comparative advantage from a set of data.
• Discuss the real-world relevance and limitations of the theory of comparative advantage, considering factors including the assumptions on which it rests, and the costs and benefits of specialization (a full discussion must take into account arguments in favour and against free trade and protection—see below).
Impact of Trade and Specialisation
key video on comparative advantage
The World Trade Organisation
• Describe
the objectives and functions of the WTO.
the WTO's main activities are:
— negotiating the reduction or elimination of obstacles to trade (import tariffs, other barriers to trade) and agreeing on rules governing the conduct of international trade (e.g. antidumping, subsidies, product standards, etc.)
— administering and monitoring the application of the WTO's agreed rules for trade in goods, trade in services, and trade-related intellectual property rights
— monitoring and reviewing the trade policies of our members, as well as ensuring transparency of regional and bilateral trade agreements
— settling disputes among our members regarding the interpretation and application of the agreements
— building capacity of developing country government officials in international trade matters
— assisting the process of accession of some 30 countries who are not yet members of the organization
— conducting economic research and collecting and disseminating trade data in support of the WTO's other main activities
— explaining to and educating the public about the WTO, its mission and its activities.
10 Benefits of the Rules Based System
1. The system helps promote peace
2. Disputes are handled constructively
3. Rules make life easier for all
4. Freer trade cuts the costs of living
5. It provides more choice of products and qualities
6. Trade raises incomes
7. Trade stimulates economic growth
8. The basic principles make life more efficient
9. Governments are shielded from lobbying
10. The system encourages good government
The WTO at 15
UK Trade Profile (WTO)
International Trade Quiz
Protectionism
Types of trade protection
• Explain, using a
tariff diagram, the effects of imposing a tariff on imported goods on different
stakeholders, including domestic producers, foreign producers, consumers and
the government. • Explain, using a diagram, the effects of setting a quota on foreign producers on different stakeholders, including domestic producers, foreign producers, consumers and the government.
• Explain, using a diagram, the effects of giving a subsidy to domestic producers on different stakeholders, including domestic producers, foreign producers, consumers and the government.
• Describe administrative barriers that may be used as a means of protection.
• Evaluate the effect of different types of trade protection.
Arguments for and against trade protection
(arguments against and for free trade)
• Discuss
the arguments in favour of trade protection, including the protection of
domestic jobs, national security, protection of infant industries, the
maintenance of health, safety and environmental standards, anti-dumping and
unfair competition, a means of overcoming a balance of payments deficit and a
source of government revenue.
• Discuss the arguments against trade protection, including a misallocation of resources, the danger of retaliation and “trade wars”, the potential for corruption, increased costs of production due to lack of competition, higher prices for domestic consumers, increased costs of imported factors of production and reduced export competitiveness.
Trade and Protectionism HL
• Calculate from diagrams the effects of imposing a tariff on imported goods on different stakeholders, including domestic producers, foreign producers, consumers and the government.
• Calculate from diagrams the effects of setting a quota on foreign producers on different stakeholders, including domestic producers, foreign producers, consumers and the government.
• Calculate from diagrams the effects of giving a subsidy to domestic producers on different stakeholders, including domestic producers, foreign producers, consumers and the government.
Prep: Complete Dorton Quantitative Economics Exercises 1 2 3 for Tariff, Quota and Subsidy on separate note paper
Exchange Rates
Determination of freely floating exchange rates
• Explain that the
value of an exchange rate in a floating system is determined by the demand for,
and supply of, a currency. • Draw a diagram to show determination of exchange rates in a floating exchange rate system.
The effects of exchange rate changes
• Evaluate
the possible economic consequences of a change in the value of a currency,
including the effects on a country’s inflation rate, employment, economic
growth and current account balance.
Government intervention
Fixed exchange rates
• Describe
a fixed exchange rate system involving commitment to a single fixed rate.
• Distinguish between a devaluation of a currency and a revaluation of a currency.
• Explain, using a diagram, how a fixed exchange rate is maintained.
• Distinguish between a devaluation of a currency and a revaluation of a currency.
• Explain, using a diagram, how a fixed exchange rate is maintained.
Managed exchange rates (managed float)
• Explain
how a managed exchange rate operates, with reference to the fact that there is
a periodic government intervention to influence the value of an exchange rate.
• Examine the possible consequences of overvalued and undervalued currencies.
• Examine the possible consequences of overvalued and undervalued currencies.
Evaluation of different exchange rate systems
• Compare
and contrast a fixed exchange rate system with a floating exchange rate system,
with reference to factors including the degree of certainty for stakeholders,
ease of adjustment, the role of international reserves in the form of foreign
currencies and flexibility offered to policy makers.
Exchange Rates HL
• Calculate
the value of one currency in terms of another currency.
• Calculate the exchange rate for linear demand and supply functions.
• Plot demand and supply curves for a currency from linear functions and identify the equilibrium exchange rate.
• Using exchange rates, calculate the price of a good in different currencies.
The Balance of Payments
The structure of the balance of payments / The meaning of the balance of payments
• Outline the role of the balance of payments.
• Distinguish between debit items and credit items in the balance of payments. The components of the balance of payments accounts
• Explain the four components of the current account, specifically the balance of trade in goods, the balance of trade in services, income and current transfers.
• Distinguish between a current account deficit and a current account surplus.
• Explain the two components of the capital account, specifically capital transfers and transaction in non-produced, non-financial assets.
• Explain the three main components of the financial account, specifically, direct investment, portfolio investment and reserve assets.
Discuss the implications of a persistent current account deficit, referring to factors including foreign
ownership of domestic assets, exchange rates, interest rates, indebtedness, international credit ratings and demand management.
Explain the methods that a government can use to correct a persistent current account deficit, including expenditure switching policies, expenditure reducing policies and supply-side policies, to increase competitiveness.
Evaluate the effectiveness of the policies to correct a persistent current account deficit.
State the Marshall-Lerner condition and apply it to explain the effects of depreciation/devaluation.
Explain the J-curve effect, with reference to the Marshall-Lerner condition.
Discuss the possible consequences of a rising current account surplus, including lower domestic consumption and investment, as well as the appreciation of the domestic currency and reduced export competitiveness.
• Calculate the exchange rate for linear demand and supply functions.
• Plot demand and supply curves for a currency from linear functions and identify the equilibrium exchange rate.
• Using exchange rates, calculate the price of a good in different currencies.
The Balance of Payments
The structure of the balance of payments / The meaning of the balance of payments
• Outline the role of the balance of payments.
• Distinguish between debit items and credit items in the balance of payments. The components of the balance of payments accounts
• Explain the four components of the current account, specifically the balance of trade in goods, the balance of trade in services, income and current transfers.
• Distinguish between a current account deficit and a current account surplus.
• Explain the two components of the capital account, specifically capital transfers and transaction in non-produced, non-financial assets.
• Explain the three main components of the financial account, specifically, direct investment, portfolio investment and reserve assets.
The relationships between the accounts
• Explain that the current account balance is equal to the sum of the capital account and financial account balances
• Examine how the current account and the financial account are interdependent.
• Examine how the current account and the financial account are interdependent.
Current account deficits
The relationship between the current account and
the exchange rate
• Explain
why a deficit in the current account of the balance of payments may result in
downward pressure on the exchange rate of the currency.
Balance of Payments HLDiscuss the implications of a persistent current account deficit, referring to factors including foreign
ownership of domestic assets, exchange rates, interest rates, indebtedness, international credit ratings and demand management.
Explain the methods that a government can use to correct a persistent current account deficit, including expenditure switching policies, expenditure reducing policies and supply-side policies, to increase competitiveness.
Evaluate the effectiveness of the policies to correct a persistent current account deficit.
State the Marshall-Lerner condition and apply it to explain the effects of depreciation/devaluation.
Explain the J-curve effect, with reference to the Marshall-Lerner condition.
Discuss the possible consequences of a rising current account surplus, including lower domestic consumption and investment, as well as the appreciation of the domestic currency and reduced export competitiveness.
Regional Trade EU Single Market
Currency Unions
Case Study Eurozone
Benefits of the Euro
Transaction costs
With a single currency, there will be no longer a cost involved in changing currencies; this will benefit tourists and firms who trade within the Euro area. It has been estimated that this benefit will be equal to 1% of GDP so will be quite significant. (this is sometimes known as frictional costs) Some studies have suggested that the Euro has led to a 6%increase in tourism, (though many other factors may be at work.)
Price transparency
With a common currency it will be easier to compare prices in different European countries because they would all be in Euros. This enables firms to source cheaper raw material and consumers to buy cheaper goods For example, arguably new car prices are higher in the UK than elsewhere, a single currency could help reduce these price differentials or make it easier for UK consumers to buy from the Eurozone. Within the Eurozone, there has been a degree of convergence in car prices since the Euro was introduced.
Eliminating exchange rate uncertainty.
Volatile swings in the exchange rate can destroy the profitability of exports (e.g. a rapid appreciation). This exchange rate uncertainty undermines business confidence in investing. Therefore with a single currency business confidence should improve leading to greater trade and economic growth.
Improvement in inflation performance
The ECB which sets interest rates for the whole Eurozone area will be committed to keeping inflation low; countries with traditionally high inflation should benefit from this greater inflationary discipline. EU inflation has been low.
Low interest rates
It was hoped membership of the Euro would help reduce bond yields as there was greater security belonging to a stronger currency. Initially this occurred with bond yields in Greece, Spain and Ireland converging on German bond yields.
Inward investment
Inward investment may increase from outside the EU as firms take advantage of lower transaction costs within the EU area. Some firms have said they prefer to invest within the Eurozone area.
Benefits to the financial sector.
The introduction of the Euro appears to have reduced the cost of trading in bonds, equity, and banking assets within the eurozone.
Problems of the Euro
Interest rates not suitable for whole Eurozone.
A common monetary policy involves a common interest rate for the whole eurozone area. However, the interest rate set by the ECB may be inappropriate for regions which are growing much faster or much slower than the Eurozone average. For example, in 2011, the ECB increased interest rates because of fears of inflation in Germany. However, in 2011, southern Eurozone members were heading for recession due to austerity packages. The higher interest rates set by the ECB were unsuitable for countries such as Portugal, Greece and Italy.
The Euro is not an optimal currency area.
If a state in the US, such as New York ,was in recession, workers in New York could move to New England and get a job. However, in the Eurozone this is much more difficult; it involves moving country and possibly learning a new language. There are more barriers to the movement of labour and capital within a diverse region like Europe. Therefore, an unemployed Greek can't easily relocate to Germany. see: Two Speed Europe
Limits Fiscal Policy.
With a common monetary policy it is important to have similar levels of national debt, otherwise countries may struggle to attract enough buyers of national debt. This is a growing problem for many Mediterranean countries like Italy, Greece and Spain who have large national debts and rising bond yields.
Lack of Incentives.
It is argued that being a member of the Euro protects a country from a currency crisis. Therefore, there is less incentive for countries to implement structural reform and fiscal responsibility. For example, in good years Greece was able to benefit from very low bond yields on its debt because people felt Greek debt would be secured by rest of Europe. But, this wasn't the case, and Greece were lulled into a fall sense of security.
No scope for Devaluation.
Since the start of the Euro, several countries have experienced rising labour costs. This has made their exports uncompetitive. Usually, their currency would devalue to restore competitiveness. However, in the Euro, you can't devalue and you are stuck with uncompetitive exports. This has led to record current account deficits, a fall in exports and low growth. This has particularly been a problem for countries like Portugal, Italy and Greece.
Interest rates not suitable for whole Eurozone.
A common monetary policy involves a common interest rate for the whole eurozone area. However, the interest rate set by the ECB may be inappropriate for regions which are growing much faster or much slower than the Eurozone average. For example, in 2011, the ECB increased interest rates because of fears of inflation in Germany. However, in 2011, southern Eurozone members were heading for recession due to austerity packages. The higher interest rates set by the ECB were unsuitable for countries such as Portugal, Greece and Italy.
The Euro is not an optimal currency area.
If a state in the US, such as New York ,was in recession, workers in New York could move to New England and get a job. However, in the Eurozone this is much more difficult; it involves moving country and possibly learning a new language. There are more barriers to the movement of labour and capital within a diverse region like Europe. Therefore, an unemployed Greek can't easily relocate to Germany. see: Two Speed Europe
Limits Fiscal Policy.
With a common monetary policy it is important to have similar levels of national debt, otherwise countries may struggle to attract enough buyers of national debt. This is a growing problem for many Mediterranean countries like Italy, Greece and Spain who have large national debts and rising bond yields.
Lack of Incentives.
It is argued that being a member of the Euro protects a country from a currency crisis. Therefore, there is less incentive for countries to implement structural reform and fiscal responsibility. For example, in good years Greece was able to benefit from very low bond yields on its debt because people felt Greek debt would be secured by rest of Europe. But, this wasn't the case, and Greece were lulled into a fall sense of security.
No scope for Devaluation.
Since the start of the Euro, several countries have experienced rising labour costs. This has made their exports uncompetitive. Usually, their currency would devalue to restore competitiveness. However, in the Euro, you can't devalue and you are stuck with uncompetitive exports. This has led to record current account deficits, a fall in exports and low growth. This has particularly been a problem for countries like Portugal, Italy and Greece.
Terms of trade (TOT) refers to the relative price of exports in terms of imports and is defined as the ratio of export prices to import prices. It can be interpreted as the amount of import goods an economy can purchase per unit of export goods.
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