Specialisation and Trade
Reasons for International Trade
- Differences in factor endowments (the amount of capital, land, labour or enterprise a
country can exploit).
- Price: Some countries produce goods at lower prices to others.
- Product differentiation: Different countries may produce goods that are similar but
not identical.
Patterns of Trade
- Impact of emerging economies: Some countries are growing very fast and as it grows
it’s likely to import more and export more.
- Growth of trade blocs: Proliferation of trade blocs are designed to increase trade
between those countries.
- Changes in exchange rates: These affect the relative prices of goods between
countries.
Comparative Advantage vs Absolute Advantage
- Comparative advantages: When a country can produce something at a lower
opportunity cost than another country
- Absolute advantages: When a country can produce more of a good.
Assumptions of Comparative Advantage
- No transport costs.
- Costs are constant and there are no economies of scale.
- Traded goods are homogeneous.
- Factor of production are perfectly mobile.
Terms of Trade
- Terms of trade is said to increase if a country can buy more imports with a given
quantity of exports.
o Price of exports increases proportionally more than price of imports.
Non-Price Theories of Trade
- Preference similarity theory: Suggests many manufactured goods aren’t imported
because they are cheaper than domestic goods but because some consumers want
greater choice than provided by domestic manufacturers.
Benefits of Trade
- Specialisation: Comparative advantage shows world output can be increased if
countries specialize in what they produce at lowest opportunity cost.
- Economies of scale: Trade allows economies of scale to be maximized and thus costs
reduced.
- Choice: Trade allows for more variety of goods.
- Innovation: As free trade means more international competition, firms are
incentivized to innovate to outcompete competitors.
Costs of Trade
Reasons for International Trade
- Differences in factor endowments (the amount of capital, land, labour or enterprise a
country can exploit).
- Price: Some countries produce goods at lower prices to others.
- Product differentiation: Different countries may produce goods that are similar but
not identical.
Patterns of Trade
- Impact of emerging economies: Some countries are growing very fast and as it grows
it’s likely to import more and export more.
- Growth of trade blocs: Proliferation of trade blocs are designed to increase trade
between those countries.
- Changes in exchange rates: These affect the relative prices of goods between
countries.
Comparative Advantage vs Absolute Advantage
- Comparative advantages: When a country can produce something at a lower
opportunity cost than another country
- Absolute advantages: When a country can produce more of a good.
Assumptions of Comparative Advantage
- No transport costs.
- Costs are constant and there are no economies of scale.
- Traded goods are homogeneous.
- Factor of production are perfectly mobile.
Terms of Trade
- Terms of trade is said to increase if a country can buy more imports with a given
quantity of exports.
o Price of exports increases proportionally more than price of imports.
Non-Price Theories of Trade
- Preference similarity theory: Suggests many manufactured goods aren’t imported
because they are cheaper than domestic goods but because some consumers want
greater choice than provided by domestic manufacturers.
Benefits of Trade
- Specialisation: Comparative advantage shows world output can be increased if
countries specialize in what they produce at lowest opportunity cost.
- Economies of scale: Trade allows economies of scale to be maximized and thus costs
reduced.
- Choice: Trade allows for more variety of goods.
- Innovation: As free trade means more international competition, firms are
incentivized to innovate to outcompete competitors.
Costs of Trade
