TRADE AND INTEGRATION

(WTO) World trade organisation- International body responsible for negotiating trade
agreements + policing the rules of trade to which its members sign up. Trade disputes are settled by the WTO.

Absolute advantage-Where one country is able to produce more of a good or service with the same amount of resources, the unit cost of production is lower Comparative adv- Where one country produces a good/service at a lower relative opp cost that others

T.O.T- The of a countrys exports relative to the of its imports. The t.o.t is measured by this
formula = Terms of trade= (Index of average export prices/Index of average import prices) x 100

Is to look at what resources that each country has. The have different Factor Endowments(differ in land, labour and capital-e.g China having a massive supply of cheap labour, Europe-abundant supplies of Capital etc) The production of different goods requires different amounts of each factor of production-they have different Factor intensities ( the bal between land, labour and capital required in production of a good or service).Diff factor endowments and diff intensities lead to the conclusion that countries with a lot of labour supplies will have a comparative adv in Labour-intensive production(any prod process that involves a large amount of labour relative to other factors of prod) and countires with abundant amounts of Capital-intensive production will have a comparative adv. However there are differences, too, in the skills of the labour force and so human capital endowment will differ. E.g USA has a lot of skilled labour force and physical capital will have a comp adv and China will have a comp adv in labour force making textiles as it is mainly unskilled and specialise in it. This is the Heckscher-Ohlin Theory of international trade.( a theory that a country will export products produced using factors of prod that are abundant and import prod whose production requires the use of scarce resources.

THE EFFECTS OF INTERNATIONAL TRADE International Trade and Global GDP Specialisation and trade lead to a more eff use of global resources-an eff use of resources is important! As resources are SCARCE!!! Through international trade global prod increased. It allows each country to specialise in a good that they can produce without using too much resources up, being more efficient. World production has increased-global GDP is higher International trade and E.O.S Without trade, production of goods+services would be limited by the size of the domestic market. Firms being able to trade with the world and supply on a global scale firms and industries can benefit from E.O.S. Higher prod for global markets will reduce AC of production. This particularly benefits smaller countries and explains why exports can be a larger % of GDP for small countries than for large countries. HOWEVER, some industries may lack the E.O.S to compete in global markets-often referred to infant industries-and gov uses protectionism to help them to go in the global market to supply. International trade and competition Trade -> increases competition -> downward pressure on prices $ Lower prices will squeeze firms profit margin-the difference between a firms revenue and costs expressed as a % of revenue. Provides an incentive for firms to lower AC by seeking efficiencies and eliminating waste. As firms are exposed to international trade, they will be forced to be productively efficient or face bankruptcy or merger!.....This raises the possibility that international trade can lead to job losses and reduction in the output of some industries. International trade and Dynamic efficiency Dynamic efficiency-relates to changes that occur over time. According to the world bank-countries that are exposed to international trade grow more in the L.T than those that are closed! There are 2 possible reasons for this: As the global economy grows, there is an increase in demand for an econs exports. Growth in demand may exceed the growth in global GDP for income elastic goods and services. Growth in exports increases AD for exporting countries. It is argues that international trade gives rises to Knowledge and technology transfer (the process by which knowledge and technology is developed in one country is transferred to another country, often through licensing and franchising-impacting AS. This happens through collaborations with other foreign firms, licensing agreements (an agreement that

ideas and technology owned by one company can be used by another, often for a charge) Foreign direct investment and the outsourcing of production. A swell as lowering prices, it also encourages innovation, adding to supply-side benefits for knowledge and technology transfer. For these reasons this is why trade is thought of as the engine of economic growth.

International trade and factor prices Overtime trade will equalise the prices of the factors of production. Chinas comparative advantage in labour-intensive production will lead to an INCREASE in DEMAND. This will lead to an INCREASE in LABOUR in China due to it specialising in the production of labour-intensive goods. This will cause wage rates in China to go up and the gap bertween the rich developed countries and the poor developed countries to narrow. This effect has been seen especially in Regional trading blocs ( EU, NAFTA). In countries that have an abundance of cheap capital, an increase in capital-intensive production caused by trade will increase the price of capital. The differences in factor prices, which encouraged trade in the first place will disappear overtime.