8.1 International Specialisation and Trade IGCSE Economics 8.1 International Specialisation and Trade

Learning Outcomes Describe the benefits and disadvantages of specialisation at regional and national levels Describe methods of trade protection Discuss the merits of free trade and protection

Video – Globalisation, you’re living IT

Globalisation – What is it? Write a definition and add it to the Socrative document Globalisation – What is it?

What is Globalisation? The increasing social, technological, political and economic interdependence and interaction between people, firms and entire economies around the world

Why has globalisation occurred?

Rapid globalisation is a result of: Increasing wealth Development of new technologies Faster and cheaper communication – internet Transition of many former planned economies to free market economies – reduction in international trade barriers

International Trade and Specialisation

Value of global trade in physical goods 1960–2010 What factors have driven this increase?

International Specialisation This is where countries/regions tend to focus on producing particular products. Usually those where they have an advantage in terms of human, man made or natural resources

International Specialisation This is where countries/regions tend to focus on producing particular products that they have the natural, human or man-made resources to do . WHY? US aircraft Spanish olive oil Italian shoes

Task – Match the country to their best known product Saudi Arabia Fish Iceland Tea Norway Timber Germany Oil Argentina Manufactured Goods France Beef India Lamb Jamaica Wine New Zealand Coffee Kenya Tourism

Answers

What does the Philippines specialise in? What factors make the Philippines able to specialise in these products? Which countries do you think the Philippines exports these products to? More info here

Who does the Philippines trade with?

Video Clip – 60 Second Adventures in Economics Why do countries

Key Question Who are the winners and losers from specialisation? Consider Customers? Workers? Businesses? Economies? In what ways might these stakeholders benefit/lose from international specialisation?

International Specialisation – Advantages By concentrating on what people and businesses do best rather than relying on self sufficiency: Higher output: Total production of goods and services is raised and quality can be improved Variety; Consumers have access to a greater variety of higher quality products A bigger market: Specialisation and global trade increase the size of the market offering opportunities for economies of scale Competition and lower prices: Increased competition acts as an incentive to minimise costs, keep prices down and therefore maintains low inflation

Disadvantage of Specialisation A country can be vulnerable if it has to rely on imports to meet its needs A country may be vulnerable if the specialized product is replaced by alternatives Jobs in areas such as production may be vulnerable if cheaper labour is available elsewhere A country also becomes very vulnerable to changes in exchange rate and also world economic conditions

Regional specialisation When regions within a country concentrate on producing things that they are best at, rather than wasting resources on products that they make less efficiently What regional specialisation occurs in the Philippines?

Absolute and Comparative Advantage Have you heard of these terms before? What do they mean? What is the difference? Absolute and Comparative Advantage

Adam Smith – Theory of Absolute Advantage David Ricardo – Theory of Comparative Advantage

Video – 6 mins

Absolute and Comparative Advantage A country has an absolute advantage in the production of a product when it can produce that product at a much lower cost per unit than any other country is able to Average cost per unit $100 Average cost per unit $130 X Y A country has a comparative advantage in the production of a product relative to other countries when its opportunity cost of producing that product is lower than in any other country To produce 100 more cars, country X must give up 4,000 televisions To produce 100 more cars, country Y must give up 7,000 televisions

Task - Question

Free Trade

Free Trade The unrestricted purchase and sale of goods and services between countries involves the movement and exchange of physical goods such as materials, component parts, equipment and finished products as well as services, ideas, money and labour, across international borders

The gains from free trade International trade involves the movement and exchange of physical goods such as materials, component parts, equipment and finished products as well as services, ideas, money and labour, across international borders

Arguments for Free Trade It allows countries to benefit from specialization They can produce what they are best able to and then trade their surplus It increases consumer choice Consumers can enjoy a greater variety of goods and services from across the world It increases competition and efficiency Firms must improve their costs and product quality to compete with overseas producers It creates additional business and employment opportunities New and existing firms can expand their sales to growing consumer markets overseas It allows firms to access the best workforces, materials and technologies from anywhere in the world

Arguments Against Free Trade Trade with low-cost economies is threatening jobs in many developed economies and reducing opportunities for less-developed economies to grow their industries Trade is increasing the rate at which we are depleting natural resources Trade may increase the exploitation of workers and the environment in many less-developed economies as multinationals are attracted to them by low wages and taxes It has increased the gap between rich and poor nations because developed and rapidly developing economies dominate global demand for many natural resources, including foodstuffs, timber and metal ores, and have used their purchasing power to force down their market prices

Methods of Trade Protection

What is protection? Protection or protectionism involves the use of trade barriers by governments to restrict international market access and competition What ways can Governments intervene in international trade?

Trade Barriers Tariffs Quotas Import Licensing Administrative complexity Subsidies Exchange control Exchange rate manipulation Embargo

Tariffs Tariffs are indirect taxes on the prices of imported goods to discourage domestic demand (by increasing prices) But imposing them often results in affected overseas countries imposing tariffs of their own in retaliation

Quotas This is a limit on the volume of an imported good allowed into a country

Import Licensing Government grants licenses for import of certain goods, not granting a licence is a type of protection

Administrative complexity (Red Tape) The government may require imports to fill in time-consuming paperwork This creates a burden that can be seen as a cost and therefore a discouragement for importers Unreasonable quality controls and strict standards requirements for imported products

Administrative complexities Size and weight restrictions Product labelling requirements Test certificates

Subsidies These are government grants paid to domestic producers to reduce their production costs, enabling them to sell their products at lower prices than overseas producers

Exchange Control Governments preventing or limiting the amount of foreign exchange to which importers have access E.g. If Argentinian importers are not allowed to buy dollars they may not be able to buy goods from the US

Exchange rate manipulation The governments can buy or sell its own currency in order to alter the exchange rate E.g. It could sell its own currency in order to reduce the exchange rate and make exports cheaper and imports expensive

Embargo A complete ban on import of certain types of goods or all goods from a specified country

Arguments for Trade Protection To protect infant (or sunrise) industries To protect sunset industries To protect strategic industries, such as agriculture, energy and defence equipment To protect domestic firms from dumping To limit over-specialization To correct a trade imbalance

Arguments against protectionism It reduces the gains from trade It restricts consumer choice It restricts new business opportunities Inefficient domestic firms protected from overseas competition will continue to be inefficient Other affected countries will retaliate against trade barriers