Transcript The International Economy

Trade and Integration
Today’s Lesson
• Discuss the effects of international trade
• Evaluate the benefits and disadvantage to
Zambia of increasing international trade
In pairs what are the benefits and
drawbacks of international trade for
developed or developing countries?
Identify 2 benefits and
2 drawbacks
Analyse with 5-6 chain
of An and graph 1
advantage and
drawback
Effects of international trade
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Increase in global GDP
Economies of scale
Competition
Dynamic efficiencies
Factor prices
• Link to Zambia and a developed country
Benefits and drawbacks of
international trade
Benefits
Developed
Use 4/5 chains of
analysis!
Diagram!
Developing - Zambia
Use 4/5 chains of
analysis!
Diagram!
Drawback
Benefits of trade
Price
Domestic Demand
Domestic Supply
Domestic suppliers have
gained
At P1 before the tariff
domestic supply 0A,
domestic demand 0D
Imports A to D. Tariff
increases prices to P2,
domestic demand falls to
0C and supply increases to
0B. Imports are only BC.
Welfare loss on units no longer
consumed
pdom
Supply
with trade
ptrade
0
A
B
C
Q post-tariff
D
Q pre-tariff
Quantity
International Specialisation
• Adam Smiths Pin Factory – Output can increase
if countries specialise
• Every country has natural resources it can
exploit – soil, climate and minerals
• Every country also has ‘man-made’ resources
i.e./ capital, know-how, labour skills.
• The benefits of division of labour suggest that if
each country specialises in what it does best,
total world production can increase.
International trade and GDP
• Specialisation and trade lead to a more
efficient use of global resources
• Resources are scarce
• As production increases, global GDP is
higher
Increased Economies of Scale
from Exporting
• Selling to a larger market can lead to
falling average costs
• Biggest benefits for countries with
relatively small populations
• Some industries may lack the economies
of scale to compete in global markets
• These are sometimes referred to as infant
industries (relatively new)
International trade and
competition
• Trade increases competition for domestic firms
• There is downward pressure on prices and profit
margins
• This leads to firms having an incentive to lower
average costs by seeking efficiencies in
production and eliminating waste
• Domestic firms will be forced to be productively
efficient or face bankruptcy
• There will be winners and losers within each
country
International trade and dynamic
efficiencies
• Dynamic efficiencies refer to changes that
occur over time
• International trade gives rise to knowledge
and technology transfer
International trade and factor
prices
• Explain what will happen to factor prices
as trade increases
Widening Choice
• Inhabitants of a country have access to
much greater variety of products available
Multiplier/Accelerator Effect
• Exports injection of demand
• Boost to exports will have multiplier and
accelerator effects on national Income
• Supply side improvements from
investment and greater factor mobility
between countries
Full Employment and Economic
Growth
• Trade is essential to achieve full
employment through derived demand from
good and services, and as a result
increased production will lead to economic
growth.
Who is
missing
from this
race?
What are the costs of
international trade?
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•
•
•
Threat to strategic industries
Threat to emerging industries
Existence of barriers to trade
Unfair competition
LDC’s
Less Developed Countries
Objectives:
• List the characteristics of a LDC
• Explain why less developed countries
have weaker economies
• Analyse and evaluate potential solutions
for growing these economies
What do you think of when you
think of a developing country?
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High population growth
High birth and death rates
Low levels of literacy
Few middle income earners
Mainly work in agricultural an extractive industries
Low skills level
Few public goods
Immature financial structure
Volatile currency
Causes of slow development
• High population growth
• Lack of natural resources. Oil made the middle
east rich. Does this always make a country rich?
Diamonds? Gold?
• Lack of physical capital
• Immature financial structure – which is essential
for saving. Saving is pivotal to growth as it is
required for investment.
• Little income available for saving
• Low levels of human capital
Using this information draw up you list of
conditions which are necessary for
economic development
• Education, training and health – this will
improve the quality of human capital
• Investment in Capital – output per head will
increase with improved technology
• Good natural resources – these can be
improved
• Innovation – this sustains economic
development and drives an economy forwards
through new products, improved processes and
better communication
Create an argument for and against a developing
country using tariffs to protect their growing
businesses
FOR
-Gives infant industries the time
to grow and develop and gain
economies of scale so they can
compete with more established
rivals from developed countries
-Gain a comparative advantage
over time
-Citizens will opt for domestic
products rather than imports,
which will increase AD leading to
increases in real output and
employment.
AGAINST
-Other countries may react and put
their own high tariffs in place
meaning that any products the
developing country did produce
would not be competitive abroad,
thus limiting the potential market
they can sell to
-Domestic industries in the
developing country may become
too reliant on the protectionism
and not be efficient
Potential Solutions
• Export led growth:
- Growth by trade in Primary Products
- Growth by trade in manufactured products
• Growth through tourism
• Development through borrowing
• Development through aid
Developing Countries
• A developing country is a country that has often low
standards of democratic governments, industrialization,
social programs, and human rights guarantees for its
citizens.
• It is often a term used to describe a nation with a low
level of material wellbeing. Despite this definition, the
levels of development may vary, with some developing
countries having higher average standards of living.
• Examples include; Vietnam, Uganda, Sri Lanka, Sierra
Leone, Romania, Pakistan, Nigeria, Morocco, Malaysia,
Fiji, Gambia, El Salvador, Cambodia, Cameroon,
Bangladesh, Bolivia, Botswana, Azerbaijan
Newly Industrialised Countries
(NIC’s)
• Brazil, China, India, Malaysia, Mexico, Philippines, South Africa,
Thailand and Turkey
• These countries are in this cataegory as they are considered to be
between a developed and a developing country.
• These countries have more advanced economies, but do not fully
demonstrate characteristics of a developed country.
• Development entails a modern infrastructure and a move away from
low value added sectors such as agriculture and natural resource
extraction. Developed countries, in comparison, usually have
economic systems based on continuous, self-sustaining economic
growth in the tertiary and quaternary sectors and high standards of
living.