EcoNOMICS SCC MS. HOWELL International trade EcoNOMICS SCC MS. HOWELL

Assumptions The law completely ignores transport costs Transport costs can be so high that the gains from trade are removed. E.g. For an island nation like Ireland, transport costs can be a major factor and act as a barrier to trade The law assumes that there are constant returns to scale This is unrealistic. We cannot be sure that two workers will produce exactly the same amount. There will probably be diminishing returns to scale

Assumptions The law assumes that workers are occupationally mobile It assumes that workers switch easily from producing one good to producing another. Workers are not completely mobile. They may require lengthy periods of training before they can switch from one type of work to another. Other barriers such as social ties, housing costs exist The law assumes that free trade exists It assumes that governments do not interfere with gains from trade. While this is true in the EU, In reality, governments interfere with free international trade in a number of different ways for a variety of different reasons. E.g. protect infant firms

Assumptions The law ignores strategic reasons for avoiding complete specialisation Governments recognise the dangers of complete specialisation. Specialising in the production of a narrow range of goods, countries could face the risk of a shortage of essential goods if some interruption to supply occurs. E.g. strike

How does the government intervene in international trade Tariff – a tax on goods imported into the country. Makes the product more expensive Also called import taxes, customs duties Advantages: Raise revenue for government Discourage imports Raise the price of foreign suppliers’ products, give domestic firms a price advantage Disadvantages: Can contribute to inflation

How govt. intervene 2) Quotas – physical limit placed by the government on the amount of a good which can be imported e.g. 200,000 pairs of shoes Advantages: Quota is flexible Help reduce imports Disadvantages No revenue earned for the government Can lead to uncertainty due to quota level changing frequently

How govt. intervene 3) Embargo – a complete ban on the importation of certain goods This barrier is not imposed as frequently as tariffs and quotas, only used in extreme circumstance Is used for: disease e.g. foot and mouth, political reasons, safety reasons e.g. electrical goods not reaching minimum safety standards 4) Administration Barriers – (red tape) are those obstacles which the government place in the path of importers in order to reduce the amount of imports into the country Such measures include: Excessive documentation, lengthy delays at ports of entry

How govt. intervene 5) Exchange Control Exchange control is a system whereby imports from a particular country are limited to a certain money value Exchange control is a quota system expressed in terms of the amount of foreign currency that can be spent on imports e.g. imports restricted to a specific value 6) Subsidies The previous five methods of intervention are designed to reduce imports, whereas subsidies are intended to raise exports. The government may encourage exports by providing a range of services to domestic firms which reduce their costs and/or increase their revenue. e.g. low interest loans available to exporters Government may subsidise certain exports directly by making a payment to the producer for each item

Importance of International Trade to Ireland 1) Market Size To increase the market for goods and services. Ireland has a domestic market of 4.3m people but the EU has a market of nearly 500m people. It allows Ireland to sell surplus domestic output on the international market and trade for commodities that we cannot produce ourselves.

Importance of International Trade to Ireland 2) Economic Growth/Greater Standard of living Trade increases wealth/GNP and this allows us purchase a greater quantity of goods and services. An increase in the demand for goods and services creates a richer economy.

Importance of International Trade to Ireland 3) Employment/Investment Opportunities To create employment - over 300,000 people in Ireland have jobs that are dependent on international trade. Efficient production secures employment. Those industries that are expanding due to benefits of trade will create more employment. This generates confidence and inspires more entrepreneurship and investment. Thus in turn increases Government Revenue & greater investment (infrastructure, grants)

Importance of International Trade to Ireland 4) Economies of Scale As countries engage in international trade, specialisation/division of labour takes place, thus firms enjoy the cost advantages of producing on a large scale. These cost savings may be passed onto consumers in the form of lower prices.

Importance of International Trade to Ireland 5) More Competitive prices of goods and services Trade results in greater competition on the market which should lead to more competitive prices for consumers. Irish businesses face a lot of competition from foreign trade which forces them to keep costs low. E.g. Irish food retailers (Dunnes) trying to compete with Lidl and Aldi

Importance of International Trade to Ireland 6) Raw Materials/Choice To gain raw materials for production (oil) and consumer goods that we cannot produce (citrus fruits) in Ireland at a reasonable price. Trade allows us benefit from a greater variety of goods services. 7) Allow the world become a wealthier place. Operating the Law of Comparative Advantage countries specialise in what they are best at and trade with other countries for the rest of their needs

Free Trade and Government Intervention. Why intervene? 1) To create/protect domestic employment – restrict imports, encourage consumers to purchase from domestic economy e.g. import substitution 2) Protect infant/indigenous firms – find it difficult to compete. Do not enjoy EoS. Government may protect firm initially. 3) Protect against low wage economies – Government may try reduce the imports from China for example to help stimulate the Irish economy and encourage consumers to ‘Buy Irish’

Free Trade and Government Intervention. Why intervene? 4) Increase government revenue – Greater demand due to increased sales from domestic industries. Gov may increase tariffs on imports 5) Prevent dumping – occurs when goods from a country are sold abroad at a lower price than the price charged for them on the home country. Takes place when a firm enjoys EoS, domestic mkt may be small and so excess output sold at lower prices A country will ban dumping of foreign goods on its home market if the government sees such dumping as a threat to domestic producers

Free Trade and Government Intervention. Why intervene? 6) Retain wealth – BoP By reducing amount of money spent on foreign imports, the the government could reduce the level of wealth leaving the country This would improve our BoP position

Free Trade and Government Intervention. Why intervene? 7) Encourage vital goods – a country may impose restrictions so to reduce its dependence on foreign supplies e.g. wheat may be cheaper to import than produce in Ireland, the government may impose tariffs on imported wheat to allow the home producer compete. This is done to ensure regular supplies of wheat, in the event of scarcity abroad, interruption to supply (conflict,war)

Factors that affect Ireland’s competitiveness Exchange rate v’s other currencies – if value of euro is high, becomes stronger currency. Price of exports increase and demand may fall Transport costs – island nation. Costs for transportation may be high and will need to be passed onto customers. Affects sales and profits Infrastructure – if rent or building costs are high, these cost must be included into selling price. Also the quality of infrastructure e.g. communications (internet)

Factors that affect Ireland’s competitiveness Labour Costs – minimum wage. If it rises to such an extent, these extra costs will be passed on to the final consumer, may result in decreased demand. Government policies – Actions can be taken to improve our exports e.g. taxes. Rate of inflation in Ireland V’s. competitor countries – If the rate is lower in Ireland than in export markets, Ireland has a price advantage = Increased sales and profits

READ Page 427: how does specialisation encourage IT? Page 432: Implications for Ireland as a Small Open Economy. Page 435: Trading Blocs (have an idea) WTO EU NAFTA