Summary of Trade
Benefits of trade:
-Tightens foreign relation
-Allows growth
-Increases standard of living
-Increases wealth
-Restructuring of economies
-Allows growth
-Increases standard of living
-Increases wealth
-Restructuring of economies
Free
Trade:
- Situations where governments impose no
artificial barriers to trade that restrict the free exchange of goods and
services.
- The most fundamental assumptions of
economists is free trade is a good thing and that this will lead to faster
levels of growth
Principle of comparative advantage: Even if
one country can produce all good more efficiently than another country, trade
will still benefit both countries if each country specialises in the production
of the good which is comparatively more efficient. This is based upon
opportunity cost.
Opportunity cost: the alternate forgone for
the production of a product. It represents the cost of satisfying one want over
an alternative want.
Advantage of free trade:
-Allows countries to obtain goods that are not produced locally
-Allows specialisation of the production of good for better efficiency and allocation of resources, leading to an increase in GDP
-Lowers average cost of production due to economies of scale
-International competitiveness will improve and this will not only lower prices and create competition but can lead to more innovations and efficiency
-Encourages innovation and the spread of new technologies
-Leads to higher standards of living as a result of lower prices, increased production and increased consumer choice. Also higher rates of economic growth and increased incomes
-Allows countries to obtain goods that are not produced locally
-Allows specialisation of the production of good for better efficiency and allocation of resources, leading to an increase in GDP
-Lowers average cost of production due to economies of scale
-International competitiveness will improve and this will not only lower prices and create competition but can lead to more innovations and efficiency
-Encourages innovation and the spread of new technologies
-Leads to higher standards of living as a result of lower prices, increased production and increased consumer choice. Also higher rates of economic growth and increased incomes
Disadvantages of free trade:
-An increase in short term unemployment may occur due to domestic businesses not being able to compete
-Difficulty in establishing new businesses and industries due to lack of protection
-Production surpluses may be “dumped” – extra product is sold at unreasonably low prices, killing other companies and reducing competition. Once the other companies are out of the market the raise the price again. This bad for the consumer and the local businesses that have suffered.
-Encourages environmentally unfriendly practices (e.g. china) as to produce goods at lower prices.
-Encourages unethical and immoral behaviours to maximise profit and lower prices (e.g. sweatshops and inhumane killing of animals)
-An increase in short term unemployment may occur due to domestic businesses not being able to compete
-Difficulty in establishing new businesses and industries due to lack of protection
-Production surpluses may be “dumped” – extra product is sold at unreasonably low prices, killing other companies and reducing competition. Once the other companies are out of the market the raise the price again. This bad for the consumer and the local businesses that have suffered.
-Encourages environmentally unfriendly practices (e.g. china) as to produce goods at lower prices.
-Encourages unethical and immoral behaviours to maximise profit and lower prices (e.g. sweatshops and inhumane killing of animals)
Methods of protection
Subsidies: payments made by the government
to local produces to cover costs and support production. Helps local businesses
compete with overseas companies.
Taxation on imports (tariffs): raises
prices of imports as to make local products more appealing
Quotas: restrictions on the amounts/values
of imports of goods and services
Government legislation: rules and laws that
prevent unethical and immoral pricing and business behaviours to protect local
businesses.
Effects of proctection:
-reduces trade between nations
-reduce living standards and global economic growth
-makes it more difficult for individual economies to specialise
-Trading blocs tends to be worst for developing economie
-reduces trade between nations
-reduce living standards and global economic growth
-makes it more difficult for individual economies to specialise
-Trading blocs tends to be worst for developing economie
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