International Trade

International Trade Economics

What is international Trade https://www.youtube.com/watch?v=MvvFwqeLCoE

International Trade is • The exchange of goods or services along international borders. This type of trade allows for a greater competition and more competitive pricing in the market. The competition results in more affordable products for the consumer. The exchange of goods also affects the economy of the world as dictated by supply and demand, makinggoods and services obtainable which may not otherwise be available to consumers globally.E.g. if we did not engage in International trade we would never have tasted bananas in Ireland.

Comparative advantage • http://www.youtube.com/watch?v=U12yZXBmQmY • Ricardo’s Law of comparative advantage states that a country should concentrate on an area where it has an advantage, or, has least disadvantage.

Comparative Advantage • Sources of comparative advantage can be : climate , low wages, political stability, education, infrastructure, skills. • Ireland top exports are : Pharmaceutical goods – we are one of the largest exporters of pharmaceutical goods in the world (28% of the market share). The main Irish export commodities are: Machinery and equipment Computers Chemicals Pharmaceuticals Live animals Animal products

There are gains from international specialization and trade. For us our agricultural goods give us a niche market. Therefore we can be considered to specialise in these goods. • International specification can be expected to result in a more efficient use of global resources.

Free Trade • While the Classical Economics school of thought argues in favour of free trade--the unrestricted flow of goods across a country's borders--most world governments, in practice, have reasons and means to employ trade restrictions. The primary purpose of these restrictions is to protect domestic producers and jobs, while keeping out or mitigating foreign competition.

Trade Restrictions • What are Trade Restrictions? • Trade restrictions are any of a number of policies that a government may use to manipulate the import and export of goods across its borders. The justifications for this manipulation--and the means of achieving that goal--are numerous, and economists refer to them as "governmental commercial policy." These policies may range anywhere from subsidies on domestic goods to taxes on foreign goods, and their aim is to eliminate foreign comparative advantage and to protect and support domestic producers. In summary, Trade restrictions are justified for reasons of national security (arms, energy, food) and to protect infant industries

Free International Trade • It is commonplace for governments to have commercial policies which include a range of barriers to free international trade. For example: Tariffs- which are a tax on Imports. They have the effect of raising the price of the imports in the domestic market. Quotas are physical limits on the number of imports permitted to enter the country. • Trade barriers such as Tariffs and Quotas are designed primarily to protect domestic producers from foreign competition.

Export Subsidy • an export subsidy is a government policy that creates an incentive for producers to supply for export as opposed to domestic consumption. These subsidies ensure that Definition : Export subsidies are payments to exporters to make sure they make a profit. • Export subsidies come in many forms such as the direct payments, low-cost loans, tax relief for exporters, or government-financed international advertising. An export subsidy reduces the price paid by foreign importers, which means domestic consumers pay more than foreign consumers. (i.e. makes cheaper for those abroad which means more people will buy – more competitive).

Import tax • Additionally, as is the case in many developing nations that rely heavily on imports, governments may use import taxes to generate a steady revenue stream.

A quick note on economies of scale • In microeconomics economies of scale are the cost advantages that enterprises obtain due to size, input, or scale of operation, with cost per unit of output generally decreasing with increasing scale as fixed costs are spread out over more units of output. • For example, the more a factory produces the less cost per item produced.

This can lead to certain companies having a monopoly or an unfair advantage of production of a certain product because It has entered the market so early it now has lower costs per unit. A new company however would not yet have this low cost so it would be difficult to compete with. • In relation to international trade this can make it difficult for less developed countries to enter the international trade market.

New Trade Theory Paul Krugmans New Trade Theory : • The advantages of economies of scale to be limited because consumers want variety. • So even if a country produces a certain product at a good price, consumers will want more choice and diversity in their goods. • A good example of this is cars : There are Kia/BMW /Ford etc… all made in different countries – Demand for difference and choice.

For your exams • Read – Principles of Economics and Irish Textbook • Make that Grade: Economics • See revision Handouts I gave out in class • See the class blog http://econsecondyear.wordpress.com/ for more readings

International Trade