International trade

Absolute AdvantageThe Law of Absolute Advantage states that each country should specialise in the production of that good in which it has absolute advantage (which they can produce cheaper / use less resources)International tradeComparative AdvantageThe Law of Comparative Advantage If a country is more efficient in producing both goods it should specialise in the good where it has the greater relative advantage and trade for its other goods.Law of Comparative Advantage

Law of Comparative Advantage AssumptionsSources of Comparative AdvantageFood some countries land / climate allows them to have a comparative advantage e.g. Irelands Dairy Products.Skills of the Workforce & Attitudes to work (Highly skilled & Educated)Low Wages e.g. textile industryPlenty of CapitalGovernments may create Comparative Advantage e.g. US Defence Airplane / Space Exploration.

Country Y is better at producing both goods. This doesnt mean it should produce both goods and County X should Produce nothing.Country Y is four time better at producing Food than X (20/5)and Three times better at producing Machinery than X (30/10)Country Y is relatively more efficient at producing food. Y should produce Food and leave X produce MachineryIn the above situation both countries dont engage in International TradeConstruct a New table after specialisation and Trade takes place

CountryFood (tonnes)Machinery (units)X-20Y40-Total Output4020Use Percentages to show the change in Total Output. 20 less Machines (50%) are produced and 15 more tonnes of food are produced (60%)Because 60% increase is better than the 50% decrease , both countries are better off from trading.Terms of Trade = tells economists the amount of imports that can be purchased with one unit of exports

CountryFoodClothingUK80 unitsChina40 unitsTotal Output80 units40 unitsWith Specialisation

10/30 * 10020/100 * 100

Benefits of ImportsMoney is leaving the country, leakage of National IncomeCompetition from abroad causes Irish firms to close down therefore Redundancies.Increased Government spending due to Increased UnemploymentDrawbacks of ImportsPurchase goods not available at home e.g. bananasWider choice (increased standard of living)Lower Prices (More competition)Businesses have access to essential raw materials, e.g. OilSome goods too expensive to produce ourselves e.g. Airplane manufacturing (huge capital expenditure)Benefits of ExportsCreates Employment increased productionMoney Inflows Injection into Irish Economy (Wealth & Economic Growth)Access to Larger Markets, therefore more consumers, increased sales and profits, (Economies of Scale)Increase in Investment (Due to increase in exports firms may have to expand)Export led growth = even if home market is in downturn , firms may increase sales & economic activity leading to an increase in activity here.Protectionism(Government Intervention)Efforts by a government to restrict free trade and in particular imports.ReasonsTo protect Irish Jobs (if consumers buy imports instead of Irish Goods, jobs at home may be lost)To Protect Irish firms from competition from imports produced in low wage economies e.g. China (no minimum wage0Political Reasons USA doesnt import or export from CubaTo prevent Dumping (goods from a country are sold abroad at a lower price than the price charged for them at home)To reduce the balance of payments Deficit = more imports than exports(more money leaving country than comes in)To allow a new industry grow (new industry may need protection in first few years to allow to expand.Barriers to Trade to reduce import

Balance of PaymentsVisible Exports = physical goods leave and money flows into the economy e.g. Beef.Invisible Exports = foreigners use Irish services and money flows in. E.g. u2 playing concert in Wembley, American Holidaying in Ireland.Visible Imports = physical goods come in and money flows out of the economy = carsInvisible Imports = Irish people use the services provided by foreign owned firms and money flows out, e.g. Duran Duran playing in Dublin and Irish holidaying in Spain

Balance of TradeVisible Exports minus Visible Imports(Exports always before Imports e before i in alphabet) Balance = Surplus or Deficit

Balance of Invisible TradeInvisible Exports minus Invisible Imports(Exports always before Imports e before i in alphabet)Balance of Payments on the Current Account(Visible Exports Visible Imports) + (Invisible Exports Invisible Imports)Or Visible Balance + Invisible BalanceOrTotal Exports Total Imports

The Word Current indicates money is flowing into or out of the economy on a continuous basis during the year.

Balance of Payments on the Capital AccountThis is a record of our receipts (inflows) and payments (outflows) of capital itemsCapital = Once off natureE.g. Receipts = Foreigners buying Irish Property, Foreigners buying shares in Irish companiesE.g. payments = Irish people buying property abroad and shares in foreign companiesSurplus or DeficitIf Exports > Imports = Surplus for all the previousThis is GoodIf Imports > Exports = DeficitThis is BadIreland BOP =SURPLUS of 127 Million EUR FOR 2011

Ireland exports: agri-food, cattle, beef, dairy products, zinc, lead and aluminium.Irelands major imports : data processing equipment, chemicals, petroleum and petroleum products, textiles and clothing.European Union is by far its largest trading partner, accounting for about 74% of exports and 60% of imports. Other major partners are U.S. and China.

Dealing With a BOP Deficit (Current A/C)Reduce Imports e.g. through tariffs, quotas etc. (Limited by EU)Import Substitution (buy Irish)Encourage Exports subsidies, tax relief, trade fairsGovernment could pursue a deflationary policy increase taxation & reduce government spending would reduce money available for imports (also affect demand and unemployment)Last resort = devalue the currency (reducing its value in terms of other countries)

80's CompilationDuran Duran80's Compilation, track 41983Alternative205308.55