Economic Issues affecting international trade Unit 22

Objectives Appreciate the extremes of income distribution internationally To understand the effect of import protection and export subsidy on businesses

Income Distribution around the World The Worlds income is not distributed evenly. Put the following list of countries in to order – the most rich first, United States, Morocco, United Kingdom, India, Brazil, South Korea, Ethiopia, Nigeria, Spain, Russian Federation, China, India

The Answer

Income Distribution around the World In the US in 2007, the average income per person was $47,850, approx £30,000. Per person means ‘per head’ – including babies and old people – not just people working. In contrast, in Ethiopia the average income per person is $780, approx £600. The average in the UK is $34,370, not as high as the US but 44 times greater than Ethiopia!!

Income Distribution around the World The graph can also be used to show the developed countries and the developing countries. High income countries are also called the developed countries. Low income countries are also called the developing countries. 54% of the worlds population live in MIDDLE income countries, 20% in LOW income countries and 16% in High income countries.

20% 54% 16%

Income, Wages, Products and Trade The level of development of an economy affects its imports (what it buys from abroad) and its exports (what it sells abroad). What affects this?..... Average income, Wages and prices Quality and technology of products

Average income Average incomes are 5 times higher in developed countries that in developing countries. This helps to explain why high income countries like the US & UK spend more on imports than low income countries. In the UK because of the high average income we buy products from around the world, clothes from China, toys from India, take holidays in Spain or the Caribean

Average income The average person in Ethiopia buys hardly any products made outside the country, let along go on holiday to other places! For UK businesses this means that they are more likely to sell their products to Europe or North America than to customers in developing countries such as India or China

Wages and Prices UK businesses and consumers can take advantage of the low wages paid to workers in developing countries. Many products like clothing are now made mainly in developing countries. Companies like Primark or Tesco offer low prices on clothing because they buy from suppliers in developing countries. Developing countries are a source of cheep imports for rich developing countries.

Quality and technology of products Price is only one factor that persuades customers to buy a product. The quality and technology of a product is also important. Many products made in developing countries are too poorly made and not sufficiently technologically advanced to be sold to customers in developed countries. So businesses in developed countries tend to sell high price, high quality goods to developing countries. Businesses in developing countries will sell lower quality less technologically advanced but cheaper products to developed countries

Import Protection and Export Subsidy Nearly every country in the world operates a protectionist policy. These are measures designed to reduce the number of imports coming in to a country and in doing so give an advantage to domestic firms, not only selling the products in the country but also in exporting the products.

Import Protection Import protection is designed to reduce imports being brought from abroad. There are many different types of import protection, One is TARIFFS or CUSTOMS DUTIES. These are taxes on imported goods, the Indian government for example charges 60% customs duties on imported cars – a £100,000 car would now cost £160,000….

Import Protection …….. High taxes on imported cars help reduce the number of foreign cars in the market – meaning that more cars produced in India are bought – helping the Indian economy.

Quotas Quotas are limits on the physical number of goods that can be imported over a period of time. For example a country may impose a quota of 100,000 cars to be imported from Japan Safety standards can also be a hidden way of reducing the number of imports. This discourages foreign firms from selling to the country because they may have to make specific products or modifications for that country

Export Subsidies May countries operate a system of EXPORT SUBSIDIES. The government may give firms that export products money (a subsidy) which helps to reduce the cost of production. The effect is to reduce the price of these goods when they are sold abroad, making the product more price competitive price so sales may be higher than otherwise…

Export Subsidies Export subsidies can simply be the opposite of a tax (like Customs duty). Round the World today, for example, governments subsidise the exports of agricultural products like wheat or cotton, giving formers an advantage over the competition in other countries. Grants are given to develop new cars, lowering the cost or research and development, so cars can be sold at a cheaper price.

Import Protection and Export Subsidy These two together mean that some businesses gain and some businesses loose out. Some businesses see their sales grow, while some products may not be sold in a particular country.

Note…..

Test Yourself

Review Questions Complete the Unit 22 review questions