<INTERNATIONAL TRADE>

--BENEFITS OF INT'L TRADE--

--TASK--

Before we start taking notes about the benefits of international trade, let's add a little 'context'. Imagine you are the Foreign Minister of a country wishing to join the WTO (find one HERE).
- WRITE A LETTER to your nation's president explaining WHY INT'L TRADE IS SO BENEFICIAL to your country as well as the global community. In your letter include:
  - - - At least FIVE of the BENEFITS listed BELOW.
      - Also do a little reserach and reference your country's MAIN EXPORT(S) in your letter. e.g Azerbaijan's biggest export is oil and mineral fuels.

"Dear President, it is imperative that we 'ascend' to the WTO as soon as possible. I believe that it will be extemely beneficial to our economy for the following reasons: Firstly,..."

--INCREASED COMPETITION--

"We simply can't compete with all these lower-priced and better-quality imports; we should reallocate our resources to the production of goods we are better at!"
When countries trade with each other, they import products from the other countries so that domestic firms become exposed to MORE COMPETITION IN THEIR DOMESTIC MARKETS. At the same time, they export products to other countries, so their own products also face MORE COMPETITION IN THE OVERSEAS MARKET. This can be beneficial, as it will FORCE INEFFICIENT FIRMS TO EXIT THE MARKET and should result in a BETTER ALLOCATION OF BOTH DOMESTIC AND GLOBAL RESOURCES.

--LOWER PRICES--

“Imported goods are driving prices down everywhere — consumers finally get a fair deal, and firms must improve or be left behind!"
INCREASED COMPETITION from FOREIGN IMPORTED GOODS leads to GREATER PRICE COMPETITION and PRICE WARS, resulting in LOWER PRICES FOR CONSUMERS.
IMPORTED INTERMEDIATE GOODS that are produced more efficiently in other countries lead to LOWER COSTS OF PRODUCTION for domestic producers, which they pass on to the consumer in the form of LOWER PRICES.

--GREATER CHOICE FOR CONSUMERS--

“Our shops used to stock the same five items… now customers can pick from products around the world — if we don’t innovate, they’ll just choose someone else.”
Through trade, countries can IMPORT A LARGER VARIETY of goods and services, possibly of HGHER QUALITY, INCREASING CHOICES FOR CONSUMERS.

--ACQUISITION OF RESOURCES--

“We don’t have the raw materials to make this at home — thank goodness we can import what we need and keep our industries running.”
Countries may NEED A NUMBER OF NATURAL RESOURCES OR CAPITAL GOODS that are NOT AVAILABLE DOMESTICALLY. Trade allows countries to import inputs they need for domestic production.

--MORE FOREX EARNINGS--

“These exports are flying off the shelves overseas — every shipment brings in more foreign currency we can use to develop the country.”
Whenever countries sell goods and services to other countries, they ACQUIRE FOREIGN EXCHANGE (FOREX), which allows them to make payments to other countries for the goods and services they import, or make other payments abroad.

--ACCESS TO LARGER MARKETS--

“Our domestic market is tiny… but once we started exporting, suddenly millions of potential customers opened up to us.”
With trade, firms now have ACCESS TO A MUCH LARGER CUSTOMER BASE, which means they can POTENTIALLY MAE MUCH LARGER SALES AND PROFITS, especially if their domestic market is small or already saturated.

--ECONOMIES OF SCALE--

“Now that we’re selling globally, we can produce in huge volumes, and as a result our average costs are falling with every batch we make.”
The possibility of trade and exports to other countries involves an EXPANSION N THE SIZE OF THE MARKET, allowing firms to produce more output, ACHIEVE ECONOMIES OF SCALE and enjoy the benefits of LOWER AVERAGE COSTS, which include LOWER PRICES and therefore GREATER EXPORT COMPETITIVENESS, or the ability to compete better in foreign markets.

--EFFICIENT RESOURCE ALLOCATION--

“Why waste time producing goods we're inefficient at?", "Lets specialise where we’re strongest and import everything else more cheaply.”
With the opportunity to trade, countries can now SPECIALSE in the production of the goods or services that it can produce relatively more efficiently than its trading partners. Without the need to devote resources to the goods it can now import, it can produce more of its specialised goods and EXPORT THEIR SURPLUS and IMPORT THE SURPLUSES of its other specialised trading partners. This should lead to BETTER RESOURCE ALLOCATION and MORE EFFICiENCY.

--MORE EFFICIENT DOM. PRODUCERS--

“Foreign rivals are raising the bar, so if we don’t upgrade our technology and skills, we’ll fall behind. Competition is forcing us to get better.”
When countries trade with each other, DOMESTIC FIRMS BECOME EXPOSED TO COMPETITON from products produced by firms in other countries. They are therefore FORCED TO BECOME MORE EFFICIENT and INNOVATIVE; in other words, they must try to PRODUCE AT THE LOWEST POSSIBLE COST and/or UPGRADE THEIR QUALITY.
If they do not become more efficient, they will have to sell their output at higher prices to cover their higher costs; consumers will prefer the lower-priced imported products, and HIGHER-COST FIRMS MAY GO OUT OF BUSINESS. Therefore, increased competition leads to greater efficiency.

--🤔THINK AHEAD: SKETCH IT#1--

"As a producer, you initially operate in a 'closed' economy consisting of a domestic supply curve (Sd) and a domestic demand curve (Dd) and sell your product at the domestic equilibrium price (Pd)."

"Sketch your market diagram on your whiteboard!"

⚠️"DO NOT ERASE!!!"⚠️

--🤔THINK AHEAD: SKETCH IT#2--

...now imagine your economy 'opens,' and you have the opportunity to sell as much of your product overseas at a single 'world price' (Pw) that is higher than your current domestic equilibrium price (Pd).

"Add this world price to your previous sketch, and label the amount sold domestically* and the amount exported?"

*The model assumes you satisfy any domestic customers first

--FREE-TRADE DIAGRAMS--

--🤔THINK AHEAD--

"If you were fortunate enough to have a "Charizard VSTAR and you took it to one of the large conventions to sell, what price would you charge?", "Would your supply have any impact on the market price?", "Explain your answer!"

--WORLD SUPPLY ASSUMPTION--

In the 'SKETCH IT!' activity above, we assumed that you could export all your produce at a single world price, but what determines this world price? The answer is the supply and demand of the entire world; as such, you would assume that if you start supplying your product on the world market, it will shift the supply curve to the right and lower the world price, right?"
⚠️WRONG!⚠️ For the following trade models to make sense, we are assuming that all countries are 'PRICE TAKERS', (much like the assumption introduced in the perfect competition unit) and that the products are VERY CLOSE SUBSTITUTES, eg, wheat, oil, etc...
In other words, we are assuming that these countries are VERY SMALL IMPORTERS/EXPORTERS, and as such, any changes in the amount of exports they supply or imports they demand will have an INSIGNIFICANT IMPACT on GLOBAL SUPPLY or DEMAND and subsequently the WORLD PRICE.
Thus, when we are drawing the model for a 'SMALL OPEN ECONOMY' we include a PERFECTLY ELASTIC SUPPLY CURVE representing the world supply at world price (Wp) at which sufficient imports can be bought to satisfy any shortages, and exports can be sold at in order to clear any surplus.

--EXPORTER--

If you did the 'SKETCH IT!' task correctly, then this is the diagram you should have drawn.
If the world price Pw is MORE THAN the domestic price Pd, then the domestic firms will base their output decisions on the world price and produce a quantity of 'Qs'.
At this price, only the quantity 'Qd' is demanded domestically; thus, they will SATISFY DOMESTIC DEMAND and EXPORT THE SURPLUS.

--🤔THINK AHEAD: SKETCH IT#3--

...now imagine your economy is open, but the single 'world price' (Pw) is LOWER than your current domestic equilibrium price (Pd).

"Add this world price to your previous sketch, and label the amount sold domestically and the amount imported?"

--IMPORTER--

If the world price Pw is LESS THAN the domestic price Pd, then the domestic firms will base their output on the world price and produce a quantity of Qs.
At Pw, Qd is demanded, yet only Qs is produced thus they will SATISFY THS EXCESS DEMAND and IMPORT THE SHORTAGE.

⚠️WELFARE ISSUES NOT COMPLETE⚠️

many past papers specimen

n22

n20

upload past papers to github add links to page of question in QP as well as to MS

--SHOW THE CHANGE IN CS AND PS WHEN THE ECONOMY OPENS--

--HIGHER LEVEL ONLY--

--PAPER 3 CALCULATIONS--

--THINK AHEAD#1--

"When it comes to producing a 'satisfying 7-day beach holiday for 100 tourists' (unit of output), do you think it would take more resources (inputs) in Thailand or the UK to produce it?", "What 'cost-free' factor endowment(s) does Thailand have that the UK would have to invest a lot of resources in trying to acquire?" "In other words, is it fair to say a unit of output like this, uses less resources when made in Thailand than in the UK?"

"On a similar note, is it fair to say a unit of wine uses fewer resources when made in France than in the China?"

--THINK AHEAD#2--

The examples above compare countries in terms of the amount of resources used per unit produced, but what if we compared countries in terms of the amount of output produced per unit of resource, would we get the same conclusion?", "Think about the vastly different 'soil quailities; that exist hectare to hectare", "What about 'hours of sunlight',

"Would you grow watermelons in the Faroe islands or Cyprus?"

--ABSOLUTE ADVANTAGE--

--THE THEORY--

THE THEORY OF ABSOLUTE ADVANTAGE is an economic concept, first articulated by Adam Smith in 'The Wealth of Nations' (1776), which states that:
"A country has an absolute advantage in producing a good if it can produce more output using the same quantity of resources (or the same output using fewer resources) than another country" In other words,
"...the most 'productive' country has the absolute advantage."
And according to the theory, "The most productive country should 'specialise' in the production of the good(s) they have an absolute advantage in, then as a result 'total global output will grow' meaning countries can trade their surpluses for mutual gains in trade."

--USING THE PPC--

In order to illustrate this, we can use linear PPC if we assume that there are only 2 COUNTRIES and 2 PRODUCTS. The numbers given are in 'UNITS OF OUTPUT PER UNIT OF RESOURCE', and for simplicity sake assume the resource is a unit of labour (Per man-hour).

--MAJOR FLAW!--

"On a per-unit-of-resource basis, specialization and trade result in gains for both countries. Sounds great, right? But on a per-nation level, it can't be used for the basis of total specilasation. Think about this RWE:

"Could a more productive fish-producing Iceland possibly specialise entirely and satisfy the demand of the less productive fish-producing China'?"

"No! In reality, China developed its own massive wool production (now the world's largest) because Australia couldn't possibly meet China's scale of demand from its huge textile industry, and now they trade according to quality etc.... but Australia certainly doesn't specialize entirely.

--THINK AHEAD--

"So the theory of absolute advantage is far from perfect and the difference in the size of each country basically limits is usefulness. So would you agree with this statement?"

"If China, has an absolute advantage in the production of both fish and crab products over Iceland, then China can't possibly benefit from trading with Iceland"

--COMPARATIVE ADVANTAGE--

--DEFINITION--

Assuming you 'Agreed' to the above statement, you are entirely 'wrong,' as according to the 'THEORY OF COMPARATVE ADVANTAGE' gains can still be made as long as BOTH COUNTRIES HAVE DIFFERENT OPPORTUNITY COSTS for their goods, in other words "Countries can both benefit from trading if they are better at making different things relative to what they give up."
And therefore a country is said to have a Comparative advantage when it has a lower opportunity cost in the production of a good than the other country. Let's look at an example to make it clearer!

--CA & 'OPPORTUNITY COST'--

Referring to the table above we can see that 'COUNTRY X' HAS AN ABSOLUTE ADVANTAGE IN THE PRODUCTION OF BOTH GOODS and this implies 'COUNTRY Y' HAS AN ABSOLUTE ADVANTAGE IN THE PRODUCTION OF BOTH GOODS.
However when we look at THE RELATIVE COSTS PER UNIT, we can see that COUNTRY X ONLY HAS A COMPARATIVE ADVANTAGE IN COFFEE, with a cost of only 0.75 units of robots forgone, compared to Country Y's 1.33 units of robots (Column 'A'),
Whilst COUNTRY Y HAS A COMPARATIVE ADVANTAGE IN ROBOTS with a cost of only 0.75 units of Coffee, compared to Country X's 1.33 units of coffee (Column 'B'),

--CA & 'GAINS FROM TRADE'--

🚨To illustrate gains from trade in this situation, we again assume that "under autarky, the countries will devote half of their resources to the production of both goods".

Now we use the COMPARATIVE ADVANTAGES previously established, SPECIALISATION OCCURS and in most cases THE COUNTRY WITH THE ABSOLUTE DISADVANTAGE IN BOTH GOODS, in this case 'COUNTRY Y', SPECIALISES ENTIRELY in the good it has a COMPARATIVE ADVANTAGE in, which is ROBOTS, producing 4R and no coffee.
Whilst 'COUNTRY X', SPECIALISES MAINLY in the good it has a comparative advantage in, namely COFFEE, but NOT ENTIRELY, producing 6C and 1.5R

Finally, they TRADE, using a 'TERMS OF TRADE (TOT)', which lies between the two opportunity costs. If we look at the table below we can choose a TOT of 1 COFFEE for 1 ROBOT. as this lies between 1C : 0.75R & IC : 1.33R

Now we decide HOW MANY UNITS TO TRADE AT THIS EXCHANGE RATE? and if we decide to trade 2C for 2R we can see that both sides GAIN FROM TRADE.

Finally, they TRADE, using a 'TERMS OF TRADE (TOT)', which lies between the two opportunity costs. If we look at the table below we can choose a TOT of 1 COFFEE for 1 ROBOT. as this lies between 1C : 0.75R & IC : 1.33R

--PRACTICE TASKS--

--"Why do I need to learn this?"--

P1: 10-marker: "Explain how specialization according to comparative advantage leads to beneficial international trade"

P1: 10-marker: "Countries often specialize and trade according to the theory of comparative advantage. Explain the limitations of this approach"

--PAST PAPER 3 PRACTICE--

--LIMITATIONS OF THE MODEL--

--UNREALISTIC ASSUMPTIONS--

FACTORS OF PRODUCTION ARE FIXED AND IMMOBILE: We assume that each country's FACTOR ENDOWMENTs (The quantity & quality of its FOPs) STAY FIXED and DO NOT INCREASE or DECREASE, whereas in the real world for example the supply of labour changes with NET MIGRATION.
TECHNOLOGY IS FIXED: The productivity levels of each unit of resources are assumed fixed, yet over time new tech inevitably changes these levels.
FULL EMPLOYMENT OF RESOURCES: As we can see on the models, full employment is assumed which as we know is never really the case.
FREE TRADE: In the real world supply and demand alone do not determine the prices of imports and exports, they are in fact heavily impacted by government PROTECTIONIST POLICES, such as IMPORT TAXES ('TARIFFS') and QUOTAS, etc...
NO TRANSPORTATION COSTS: In reality, a country may well have an absolute and/or comparative advantage in a good, but if its location means expensive transportation costs then this advantage will be eroded.

--LIMITS STRUCTURAL CHANGE--

As an economy develops, THE PRIMARY SECTOR usually SHRINKS, while the MANUFACTURING SECTOR GROWS.
As a result, its COMPARATIVE ADVANTAGE WILL CHANGE. For example, China has seen its CA change drastically from agriculture to textiles to high-tech products.
This has all been made possible due to specific INTERVENTIONS BY THE GOVERNMENT, such as a STRONG FOCUS ON EDUCATION and the improvement in human capital.
As such, if a developing country CONTINUES TO SPECIALISE IN ITS COMPARATIVE ADVANTAGE in PRIMARY OUTPUT, then it will BE UNABLE TO CHANGE STRUCTURALLY.

--OVER-SPECIALISATION--

OVER-SPECIALISATION in only a few products leaves the economy VULNERABLE TO ECONOMIC DOWNTURNS, in addition, if the products are AGRICULTURAL then they are also PRONE TO UNPREDICTABLE WEATHER & CLIMATE DISASTERS.

--WWW.EDULASTIC.COM--

--VIDEO RESOURCES--

--PAST PAPERS--

Q) The following diagram illustrates the production possibilities of two countries, Country A and Country B, in the production of cotton and bananas.

a) Using the diagram, calculate the opportunity cost of producing one tonne of bananas in Country A [1]

b) Using information provided in the diagram to support your answer, determine which country should specialise in the production of cotton. [2]

c) Distinguish between the terms absolute advantage and comparative advantage. [2]

d) Explain two reasons why specialisation in a narrow range of primary products according to the theory of comparative advantage might not benefit an economically less developed country. [4]

'If we were to think about national generalisations rooted in educational focus and cultural prioritisation, what academic subject and related-activity within it might we say that "...a typical student from Hong Kong would be best at producing on a per-hour basis?", "How about a Brazilian student?", "What about a Russian student?"... "What about a nobel peace prize, why do some countries dominate over others (HERE)?"

These generalizations point not to innate ability but to the powerful influence of systemic emphasis—where curriculum investment, teaching methods, and cultural value shape the hourly productivity of a "typical" student within a specific subject.

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