Essay: International trade concepts

 
1. Explain what is meant by the term, ‘free trade’?
Free trade is a term that you can to use to describe the transaction of goods and/or services between different countries without either nation having the ability to put any trade barriers transactions. Some examples of trade barriers are tariffs, quotas and embargos. A tariff barrier is when specific imports are taxed more than normal products. A quota is when the importation of a product is limited. An embargo is when the product is completely restricted being imported to the country. This diagram represents the system of free trade.
2. Before talking about absolute and comparative advantage, it is essential to understand the term ‘opportunity cost’. The fundamental economic problem is the scarcity of resources. A scarcity in resources means that people have to make choices on if they want one thing or another. The benefit that you lose from choosing one alternative over another is known as an opportunity cost.
Absolute advantage is a hypothetical term that can be given to nation that can produce a product/service cheaper than another nation. Comparative advantage is when one nation has a lower opportunity cost for producing one product over another.
Nation UK USA
Wool (Kilograms) 10 6
Example 1
Nation UK USA
Wool (Kilograms) 10 6
Wheat (Kilograms) 15 12
Example 2
A
As seen in example 1, the UK can make 10kg of wool for the same cost as what it takes the USA to make 6kg. This gives the UK absolute advantage as they can produce the product cheaper.
In example 2, the UK can produce 15kg of wheat for the same price as 10kg of wool, meaning that for every kilogram of wool, they can make 1.5kg of wheat. The USA can produce 12kg of wheat for the same price as 6kg of wool, which means for every kilogram of wool, the USA can produce 2kg of wheat. This gives the USA a comparative advantage in producing wheat instead of wool as they have a smaller opportunity cost than the UK has for doing so.
3. International trade has led to businesses having the ability to purchase and use different, higher quality and cheaper materials. This means that businesses in our nation can then make a larger variety of products and can also make higher quality products at a cheaper price.
Trading internationally gives nations and businesses a larger market to sell to, which is great for nations with an excess of raw materials. This gives them the chance to sell extra materials that they do not need to different nations, which would make more money. An example of this Saudi Arabia. This country produces an enormous amount of oil, but they do not need near as much as they produce. They sell most of their oil to other nations and make a large profit from it.
As mentioned above, international trading has allowed nations to create more products to sell abroad, as well as selling their extra raw materials they do no need. As nations will produce a larger amount of the same product, this will lead to specialisation in production of these goods. Specialising in producing these goods makes the production process of these goods will become more time and resource efficient.
Barriers to Trade
Definition: Barriers to trade are government implemented legislation regarding the importation of goods from other nations. These barriers are usually used to make it harder for certain products from other nations to come into that country.
Examples:
A well-known barrier to trade is a tariff. A tariff is when a certain imported product is taxed for coming into the country. This is usually used to make it less profitable for products from other countries to be imported.
Another example of a barrier to trade is an embargo. An embargo is when the government completely bans the importation of a specific good, which stops it from coming into the UK market.
Protectionism
Definition:
Protectionism can be described as the steps that a government makes to protect a market (barriers to trade).
Examples:
Donald Trump recently imposed a larger tariff on the importation on steel and aluminium to the USA, discouraging other nations to export those materials to America.
Another example of protectionism is again from Donald Trump, with his larger tariffs on cars from China, and threats to impose the same to the EU. He is discouraging the trading of foreign cars in the US so that more US cars are produced and sold in the US. This means that the money used in selling the car is kept in the US economy.
4. Protectionism can be described as the steps that a government makes to protect a market (imposing restrictions or banning specific products and services from being imported). The result of doing so allows products to be produced and sold in their own economy, meaning there are more jobs and money stays in their own economy.
5. The World Trade Organisation (WTO) is the body that regulate international trade between nations. The WTO has been doing so since 1 January 1995.
The aims of the WTO are to:
• Improve the living standard of the population of the member states.
• Lower unemployment rates.
• Increase the size of production and trading.
• Protect the environment of different nations.
The functions that the WTO do are:
• Implementing rules and regulating trade.
• Encouraging the maximum use of the world’s resources.
• Diplomatically resolve conflicts and disputes between nations.
• Providing a fair place for all member nations to trade.
India and China have put in complaints to the WTO concerning the US. They are complaining about the measures (trade barriers) that the US have put on steel and aluminium products. These disputes are still ongoing and have not came to a conclusion yet.
China have also put in a complaint to the WTO concerning the US. China are complaining about the tariff measures on good from China, claiming that the measures the US have put in place are ’inconsistent’ with certain articles. This dispute is still ongoing and has not concluded yet.
6. The European Union (EU) is a collection of 28 European countries. The EU is concerned with the social, economic and security policies of all of the member states. The EU consists of five main bodies: European Parliament, Council of the Union, European Commission, Court of Justice, and the Court of Auditors.
The EU’s aims are:
• Remove trade barriers imposed on imports and exports of goods between member states.
• Ensuring trading between member states is done efficiently and without conflict.
• Protect and repair the environment.
• Prevent exclusion of member states.
• Respect different cultures and languages between members.
The functions of the EU are:
• Create and implement law and regulations for all member states of the EU to follow.
• Enabling people of the member states to travel freely between member states.
• Maintaining price stability of the Euro.
• Sanctioning member states that do not follow law and regulation set out by the EU.
7. A nation’s balance of payments is a record of the financial transactions with the rest of the world. These records are broken down into different aspects of the balance of payments.
The current account:
The current account concerns the nation’s income and expenditure transactions of goods, services, income from investments and current transfers.
The capital account:
The capital (previously the finance) account concerns the nation’s long term transactions between the rest of the world. This includes buying and selling non-produced non-current assets (e.g. land, trademarks and copyrights) and capital transfers.
Errors and Omissions:
As mistakes and miscalculations can occur, there are sometimes errors and omissions. This section takes account for these types of mistakes.
The UK current account in quarter 4 of 2017 was -18,443(GBP million). This is a poor current account figure for a nation, but has been recovering since quarter 2, where the current account was -25,639 (GBP million). Quarter 4 of 2018 was the best UK current account since 2012.
The capital account in quarter 4 of 2017 was 41,517 (GBP million). This means that there was 41,517 (GBP million) more investment into the UK from other nations than what there was of the UK investing abroad.
Errors and omissions in quart 4 of 2017 was -8,499 ( GBP million). This is the margin of inaccurate calculations and information that was missing.
8. The following graph is a visual representation of the trends of the current balance for the UK in the last 30 years.
The graph illustrates that the UK’s account has decreased majorly in the past 30 years. The account had been somewhat stable until 2007-2008 when it experienced a trough due to the global ‘credit crunch’ occurred, leading to the nation experiencing a recession (known as the great recession). The trough in 2017 is due to the ‘Brexit’ poll result. As the UK had voted to leave the EU the economy was damaged greatly.
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10.  Fixed exchange rates Definition: A fixed exchange rate is when a government wants to keep their currency at the same value as another country. For example the Turkish central bank is allowing some of their debtors the opportunity to make payments in Lira, at a fixed exchange rate. This rate is 4.2 lira per dollar.
Advantages: An advantage of fixed exchange rates is that it avoids currency fluctuations. If the value of a currency is changing rapidly then it can affect an exporting firm, as the value of their currency increasing makes it unattractive, losing customers.
Another advantage of using a fixed exchange rate is that investors will know what that currency is actually worth. This attracts foreign direct investment as changes in the exchange rate are not a danger to the investor.
Furthermore, another advantage of fixed exchange rates is that it will help to keep inflation low. Inflating your currency will lead to your currency being behind the fixed exchange rate it targeted.
Disadvantages: A disadvantage of fixed exchange rates is that you may join the exchange rate at the wrong time, when it is at the wrong value to follow. If the value of an exchange rate is too high then it will make their exporters uncompetitive. Making their exporters uncompetitive will lead to less demand for their products, and a lower growth, which will effect the balance of payments.
Another disadvantage of fixed exchange rates is that it may imbalance your current account. For countries in the Eurozone, the nation’s market may not match the exchange rate of the euro. They cannot devalue the euro so it will create a current account deficit.
Another disadvantage of fixed exchange rates is that it is challenging to keep the exchange rate at the right level it should be at. If the exchange rates are overvalued then the government need to step in and keep that value. To do so they may need to sell foreign currency they have in order to buy their own currency, which would then fix the exchange rate.
Floating exchange rates Definition: A floating exchange rate is when a currency is not trying to match a certain rate in relation to other currencies, but solely on the supply and demand. An example of this is Nigeria, who now use a floating exchange rate. A boom in oil price allowed the nation’s economy to grow at a rapid rate. After the price then dropped again, their income did the same, which led to a slower growth rate. This then meant that they could not keep up at the same fixed exchange rate, and thus changed to a floating exchange rate.
Advantages: An advantage of floating fixed rates is that there is no target that the currency needs to make, thus foreign currency reserves and gold can be kept, without having to sell it to meet targets. This is helpful as it reduces the processes required for meeting the target.
Leading on from the last point, another advantage of using a floating fixed rate is that you can have a lower amount of reserves (compared to fixed rates). As you would not require reserves due to inflation from a currency you are fixed to, you can spend your reserves on goods and investment, instead of holding them in time of need.
Furthermore, Another advantage is that the currency can avoid inflation caused by other currencies. For example, if the Australian dollar was using a fixed exchange rate with the British pound, and the British pound inflated, the Australian dollar would do so too.
Disadvantages: A disadvantage of a floating currency rate is that it may lower foreign direct investment. A floating currency increases fluctuations in the value of the currency, which creates uncertainty. This uncertainty can make investing in that currency risky and unattractive, reducing foreign direct investment.
Another disadvantage of floating currency rates is that the currency value is less disciplined. As there is no target to meet for the currency value, a problem like inflation may not be fixed, which can create a larger crisis.
Furthermore, another disadvantage is that it may be harder to create a long term plan for the currency. As there is no certainty on the future value of the currency, it may be harder for future plans and decisions to be made, which can cause a lack of growth.
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12. Afghanistan is a nation that has been classed by the United Nations as a Less Developed Country. A less developed country (LDC) is a less-developed nation that can be vulnerable to environmental and economic changes.
A factor in which the United Nations looks at when defining a nation as an LDC is human assets income per capita. The income per capita needs to be at least 1,242 (US Dollars) in order to be excluded from the list of LDCs.
Another factor that the United Nations looks at when defining a nation as an LDC is the human assets of the nation. Human assets include:
• Secondary school enrolment.
• Under-nourishment.
• Maternal mortality.
• Adult literacy.
• Under five mortality.
If the nation does not meet the standards of these factors, then they do not have the correct human assets to be excluded from the list of LDCs.
13. An issue facing NICs is multinational companies (MCS). As NICs have invested heavily in industry, new technology and education – it can become an attractive nation for MNCs to enter. Mostly people would find that as an advantage, but it has outnumbering disadvantages on the NIC. Most of the profit made from MNCs will be taken out of the NIC and taken to where the MNC came from. Also skilled labour jobs will be needed for the MNC in the NIC. This means that instead of hiring local workers, they will source skilled labour from other nations. Sweat shop labour may also be present. Low wages and poor working conditions makes it a bad job for someone in an NIC. An example of this is Taiwan. Sweat shops are highly present in Taiwan. MNCs use this nation to get cheap labour, and then take the profit out of the nation
An issue facing LDCs is tax. In LDCs it is harder to collect tax from the population. For and LDC to develop and grow they need money. Receiving tax from LDCs can be a lot harder as they are a lot less structured as NICs. An example of this problem is Tanzania. Tanzania collect taxes that cover only have of their costs. Increasing taxes is near impossible in Tanzania due to the lack of money that their population has, which means that it is a lot harder for Tanzania to develop.
14. A transnational (multinational) firm is a business that has set up operations in more than one nation. Selling goods in more than one nation does not make a business a transnational firm – the business needs to operate and produce a good or a service in more than one nation.
Transnational firms entering LDCs provides employment for the country. Creating jobs means that people will receive wages that can be spent elsewhere, as well as being taxed by the government. This cycle of job creation is what improves the flow of a nation’s economy.
This also allows new technology and methods of production to be brought into the LDC. New technology will allow the nation to produce products quicker and more efficiently. Doing this means that the nation can make more products and use less materials for making a product.
Furthermore, transnational firms entering LDCs gives the people of that nation a wider variety of choice for products. LDCs will usually have a limited span of what they can buy. As well as giving the local population a bigger choice of products, it may also be cheaper to buy these products. As the products are produced in the nation, the producer of the product needs to spend less on importing the product and transporting the product large distances, reducing the costs for the firm. Then they can sell the product at a lower price than imported goods.
Transnational firms are usually very large firms with a strong brand image. If others see that firms such as these are investing into these LDCs, it will make the nation more attractive to invest in, which will hopefully bring other large firms into that nation.
Transnational firms may affect the environment of the nation. Large firms want to produce products at a low price, and will sometimes become oblivious to the impact that doing so does. The environment may be damaged as a result of the actions of the transnational firm, which can ruin other materials and resources the nation has. It is hard for an LDC’s government to stop this as the transnational firm will have a huge influence on government decisions as they have a large obdurate presence in their economy.
Transnational firms will also not be reluctant in transfer pricing. Transfer pricing is when a firm attempts to minimise tax payments. This can be done so by transporting partly finished goods into another nation they operate in to avoid high tax rates. Doing so would hurt the economy of the LDC as they would lose out on a lot of tax they should receive.
A transnational firm entering an LDC market can severely hurt other businesses. Larger firms present huge competition to small firms that operate in the LDC. The transnational firm will be too big competition for most small businesses that they will go bust, which will hurt the economy of the LDC.
31.5.2018