Transcript S.S. 10 unit 4 -pp- 403 - international_trade

International Trade
“The Basics”
The Gains From Large
Scale Specialization
Brainstorm
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Why do companies become so large?
Is there some advantage?
Handouts
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The Gains from Large Scale
Operation
Key Concepts-Specialization
Economies of Scale
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Economies of scale cannot be achieved unless the
market available for the product is large enough so that
all the product can be sold.
Large countries such as the United States may have
large enough markets to support economies of scale, but
smaller countries such as Canada cannot develop a large
enough market unless they are able to export the
surplus production to other countries.
Small countries, if they attempt to be self-sufficient in
everything they produce would find that their runs would
be very small with the result that most products they
wanted to produce would have very high average (or
unit) costs.
International Trade
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International trade is the exchange of goods and
services between countries.
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An import is the purchase of a good or service made
from another country.
An export is the sale of a good or service to another
country.
A nation trades because it lacks the raw
materials, climate, specialist labour, capital or
technology needed to manufacture a particular
good. Trade allows a greater variety of goods
and services.
Comparative Advantage
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The principle of comparative advantage states
that countries will benefit by concentrating on
the production of those goods in which they
have a relative advantage.
For instance, France has the climate and the
expertise to produce better wine than Brazil.
Brazil is better able to produce coffee than
France. Each country benefits by specializing in
the good it is most suited to making.
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France then creates a surplus of wine which it can
trade for surplus Brazilian coffee.
Protectionism
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Protectionism occurs when one country reduces
the level of its imports due to economic
circumstances within their own country or as a
result of disputes between nations.
This can lead to unfavourable relations between
nations and even spread to their allies.
Advantages of Protectionism
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Protectionism occurs when one country reduces
the level of its imports because of:
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Infant industries. If new businesses producing new-
technology goods (eg computers) are to survive
against established foreign producers then temporary
tariffs or quotas may be needed.
Unfair competition. Foreign firms may receive
subsidies or other government benefits. They may be
dumping (selling goods abroad at below cost price to
capture a market).
Strategic industries. To protect the manufacture of
essential goods within the country.
Declining industries. To protect declining industries
from creating further structural unemployment.
Disadvantages of Protectionism
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Prevents countries enjoying the full benefits of
international specialization and trade.
Invites retaliation from foreign governments.
Protects inefficient home industries from foreign
competition. Consumers pay more for inferior
produce.
Protection Methods
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Tariffs:
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Tariffs (import duties) are surcharges on the price of
imports.
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Quotas:
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Quotas restrict the actual quantity of an import
allowed into a country.
Other Protectionist Methods
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Administrative practices can discriminate against
imports through customs delays or setting
specifications met by domestic, but not foreign,
producers.
Exchange controls (currency restrictions)
prevent domestic residents from acquiring
sufficient foreign currency to pay for imports.
Conclusion
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Those who trade often have a higher standard
of living because they will have more and better
products to choose from.
The living standards of people in all regions will
be higher when each region specializes in
producing goods in which it has some natural or
acquired advantage and obtains other products
by trade.
Most nations employ some means of protecting
their economies against competition from
foreign commodities.
Conclusion Cont…
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There are three ways in which countries can
reduce its imports:
1) They can place a tax known as a "tariff" on
imported commodities in order to raise their
price to the consumer.
2) They can impose an "import quota" which
places limits on the amount of a particular
commodity that can be imported into the
country.
3) They can impose domestic policies that
reduce the demand for an imported
commodity.