IB Economics: International Trade


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Han Zhang
Mind Map by Han Zhang, updated more than 1 year ago
Han Zhang
Created by Han Zhang almost 10 years ago

Resource summary

IB Economics: International Trade
  1. Reason for Trade
    1. Gains
      1. Specialisation and comparative advantage
        1. Increased choice
          1. Lowe costs/ prices
            1. Competition
              1. Economics of Scale
                1. Increased efficiency in the allocation of resources
                  1. Source of foreign exchange (import)
                  2. World Trade Organization (WTO)
                    1. Deals with global "rules" for trading, while aiming for reduction in protectionism and promotion of free trade
                      1. Functionality
                        1. Execute and administer agreements
                          1. Provide a forum for trade negotiation
                            1. Rule on trade disputes
                              1. Monitor trade policies
                                1. Provide assistance to ELDCs on trade issues
                            2. Free Trade/ Protectionism
                              1. Free trade
                                1. the international exchange of goods and services without any artificial barriers to trade
                                  1. Comparative advantage
                                    1. Specialisation -> Efficiency use of resources
                                    2. Benefits to producers and consumers
                                      1. Lower costs and prices
                                      2. Decrease prices in importing
                                        1. Competitiveness and efficiency
                                          1. Market > Government
                                            1. No retaliation from barriers
                                              1. Allocation of resources
                                              2. Protectionism
                                                1. Infant industry arguments
                                                  1. Underdeveloped economies can't compete with Developed economies
                                                  2. Anti-dumping
                                                    1. Pricing below cost to gain competitiveness (subsidy)
                                                    2. Protecting employment
                                                      1. Balance of Payments
                                                        1. Positive current account
                                                        2. Externalities and demerit goods
                                                          1. Education/ healthcare underprovision
                                                          2. Strategic/ security reasons
                                                            1. Unrealistic assumptions of comparative advantages
                                                            2. Advantages of one is disadvantage or the other
                                                              1. Quotas
                                                                1. a physical limit on imports in terms of volume or value
                                                                  1. Similar effect as tariff
                                                                    1. Instead of government revenue foreign importing firms with quota license
                                                                      1. Buying goods at world price and selling for higher
                                                                      2. Global misallocation
                                                                    2. Tariff
                                                                      1. Tax on imports
                                                                        1. Boosts Domestic firms
                                                                          1. Raises Government revenue
                                                                            1. Effectiveness depends on elasticities of D and S
                                                                              1. Deadweight welfare loss
                                                                                1. Global misallocation
                                                                                2. Subsidies
                                                                                  1. artificially lower the costs of producer thus reducing price of G & S
                                                                                    1. Less imports more domestic supply
                                                                                      1. Negative effect on government budget
                                                                                        1. Global misallocation
                                                                                      2. Economics Integration
                                                                                        1. Globalization
                                                                                          1. the geographical dispersion of industrial and service activities and the cross-border networking of companies
                                                                                          2. Preferential trade agreement
                                                                                            1. Bilateral (2) or Multilateral (many)
                                                                                              1. Partner > low cost producers
                                                                                              2. Trading Blocs
                                                                                                1. Free Trade Area
                                                                                                  1. When countries form a trading area within which they move goods and services freely but each individual country retains its own barriers to outside countries
                                                                                                  2. Custom Union
                                                                                                    1. Individual country trade barriers no longer exist and there is a unified trade policy
                                                                                                    2. Common Market
                                                                                                      1. A customs union with the free movement of factors of production as well
                                                                                                        1. Reluctance to surrender both economic and political sovereignty stop further intergration
                                                                                                    3. Monetary Union
                                                                                                      1. a common market with a common currency and a common central bank
                                                                                                        1. Advantages
                                                                                                          1. More efficient resource allocation
                                                                                                            1. Increased quality of life/ real income
                                                                                                              1. Easier to trade
                                                                                                                1. Price transparency
                                                                                                                  1. Coordinated macro policy with lower inflation and interest rates
                                                                                                                    1. Increase inward investment
                                                                                                                      1. Reduced Exchange Rate uncertainty between members
                                                                                                                      2. Disadvantages
                                                                                                                        1. Increased competitive costs
                                                                                                                          1. Lower levels of integration, firms exploit differences in employment and environmental legislation
                                                                                                                            1. Loos of economic sovereignty (Monetary)
                                                                                                                              1. "One size fits all" monetary policy
                                                                                                                                1. Asymmetric shocks
                                                                                                                            2. Exchange Rates
                                                                                                                              1. the price of one currency in terms of another
                                                                                                                                1. Types of ER
                                                                                                                                  1. Floating
                                                                                                                                    1. Demand
                                                                                                                                      1. Demand for exports
                                                                                                                                        1. Inflows of investments
                                                                                                                                          1. Speculative buying
                                                                                                                                            1. Central Bank buying currency
                                                                                                                                            2. Supply
                                                                                                                                              1. Demand for imports
                                                                                                                                                1. Outflows of investments
                                                                                                                                                  1. Speculative selling
                                                                                                                                                    1. Central banks selling currency
                                                                                                                                                    2. Factors of Change
                                                                                                                                                      1. Monetary
                                                                                                                                                        1. Interest rates and investors
                                                                                                                                                        2. Fiscal
                                                                                                                                                          1. Investor confidence
                                                                                                                                                          2. Growth
                                                                                                                                                            1. AD on imports/ exports
                                                                                                                                                            2. Inflation
                                                                                                                                                              1. Purchasing Power Parity Theory
                                                                                                                                                                1. ER will adjust in long run due to PPP
                                                                                                                                                              2. Trade Balance
                                                                                                                                                                1. Trade surplus ER rise, Trade deficit ER fall
                                                                                                                                                                2. Speculation
                                                                                                                                                                  1. Huge impact
                                                                                                                                                                3. Depreciates and Appreciates
                                                                                                                                                                4. Managed
                                                                                                                                                                  1. Government intervention
                                                                                                                                                                    1. Set limit to achieve macro objectives
                                                                                                                                                                  2. Fixed
                                                                                                                                                                    1. Government intervention
                                                                                                                                                                      1. Use IR and Currency reserves
                                                                                                                                                                      2. Devalues and Revalues
                                                                                                                                                                    2. Common Currencies and Monetary Integration
                                                                                                                                                                      1. Adv. Float (Opposite for Dis. Fixed)
                                                                                                                                                                        1. No currency reserves
                                                                                                                                                                          1. Monetary policy free to target domestic goals
                                                                                                                                                                            1. Automatic balance of payments adjustment
                                                                                                                                                                              1. Reduced risk of speculation
                                                                                                                                                                              2. Adv. Fixed (Opposite for Dis. Float)
                                                                                                                                                                                1. Inflation discipline
                                                                                                                                                                                  1. Certainty through currency stability increased trade
                                                                                                                                                                                    1. Reduced costs of currency hedging for firms
                                                                                                                                                                                    2. Strong currency
                                                                                                                                                                                      1. Adv
                                                                                                                                                                                        1. Reduced import costs
                                                                                                                                                                                          1. Inflationary discipline
                                                                                                                                                                                            1. Improvement in the terms of trade
                                                                                                                                                                                              1. Increased real purchasing power abroad
                                                                                                                                                                                              2. Dis
                                                                                                                                                                                                1. Increased import penetration
                                                                                                                                                                                                  1. Exports struggle to maintain competitiveness
                                                                                                                                                                                                    1. Reduces economics growth
                                                                                                                                                                                                      1. Asymmetrical effects on regions and sectors
                                                                                                                                                                                                2. Balance of Payment
                                                                                                                                                                                                  1. An account of a country's financial transaction with the rest of the world
                                                                                                                                                                                                    1. Current Account
                                                                                                                                                                                                      1. the value of trade in G&S and net investment income and transfers
                                                                                                                                                                                                        1. Balance of trade in G&S; Income; Current transfer
                                                                                                                                                                                                          1. Current account deficit
                                                                                                                                                                                                            1. Export < Import
                                                                                                                                                                                                              1. Downward pressure on ER
                                                                                                                                                                                                                1. Long term risks
                                                                                                                                                                                                                  1. Capital Flight (capital transfer over sea)
                                                                                                                                                                                                                    1. Inflationary, might need IR rise
                                                                                                                                                                                                                      1. Opportunity cost of debt funding
                                                                                                                                                                                                                        1. Effects on credit rating
                                                                                                                                                                                                                      2. Current account surplus
                                                                                                                                                                                                                        1. Export > Import
                                                                                                                                                                                                                          1. Upward pressure on ER
                                                                                                                                                                                                                            1. Long term risks
                                                                                                                                                                                                                              1. Risks of protectionist measures for deficit countries
                                                                                                                                                                                                                                1. Upward pressure on the currency
                                                                                                                                                                                                                            2. Capital and financial account
                                                                                                                                                                                                                              1. Capital flows (shares, government debt and foreign investment)
                                                                                                                                                                                                                                1. Capital account: Capital transfer; Transactions in non-produced, non-financial assets
                                                                                                                                                                                                                                  1. Financial account: Direct investment, Portfolio investment, Reserve assets
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