International Trade

International Trade

Benefits of international trade

• Comparative advantage allows businesses to specialise and increase their income and standard of living
• With specialisation countries are able to exploit economies of scale
• Increases efficient allocation of world resources
• Increased competition for producers which leads to improved productive and allocative efficiency
• Greater choice for consumers

Costs of international trade

• Can lead to diseconomies of scale if production gets too large
• Transport costs are not included in comparative advantage model
• Countries may become over dependent on one industry therefore may be vulnerable to any changes in global markets
• Can damage infant industries

Trade between the UK and Rest of the World

The world economy is becoming increasingly global. The UK has an open economy as far as trade is concerned.

The EU is a customs union which allows free trade of goods and services between member countries. Majority of UK’s trade is within the EU – this is increasing.

The UK’s largest trading partner is the USA accounting for 15% of trade although this is decreasing. Increasingly the UK is trading more with emerging economies such as China, Thailand, Malaysia, Singapore, South Korea and Taiwan. At the moment the UK is the 2nd largest exporter of services in the world and the 8th largest exporter of goods

Trade with Developing Countries

Trade is seen as a crucial way of increasing the development of a countries economy. Many developing countries are now producing more manufactured goods which they are exporting overseas.

However there is still a reliance on commodities such as agricultural products for many of the worlds poorest economies which makes them vulnerable to changes in supply or demand.

Two major ways economies can pursue their goal of development:

1. Import substitution – the country produces what it had originally imported, idea is that you import capital goods to produce the consumer goods required however this strategy has had little success

2. Export promotion – where the country seeks to identify markets where they can exploit their comparative advantage