Benefits Of Free Trade

- Allows specialization of resources increasing output

- Increase competition
- Leads to lower prices
- All industries that are competing internationally in a free market have to be productively efficient
in order to be price competitive if they are to stay in business. Therefore international trade leads
to improvements in efficiency and lower prices.

Aims and Functions of the WTO

- Encourages trading countries or trading blocs to remove or reduce barriers to trade, such as tariffs
and quotas on imported goods and services, and subsidies given by a government to its domestic
industries.
- It also promotes anti-dumping legislation.

Absolute advantage
- a country has absolute advantage in the production of a good if output of the good from a given
amount of resources is greater than in another country.

Arguments in favour of trade protectionism

- It will protect hib’s from foreign competition
- It can correct a trade deficit
- It will protect against possible dumbing
- To ensure self sufficiency from other countries
- To develop domestic firms

Arguments against trade protectionism

- Creates inefficiency
- Limits competitions and increases monopoly powers
- Responsible for misallocation of scarce resources
- Leads to higher price for consumers
- It increases the production cost of firms importing intermediate goods
- It limits options to consumers and firms

Tariffs
- A tariff is a tax placed on imports.
- A tariff increases the price domestic consumers pay thereby reducing quantity demanded. Foreign
producers do not receive the higher price because the tariff that consumers pay goes to the
government not the foreign producers. They receive the same price as they did before the tariff.
 - After the tariff the price consumers pay increases
and the quantity demanded falls. Domestic producers
increase quantity supplied in response to the higher price.
Domestic producers now supply a greater quantity than
before the tariff and because quantity demanded has
decreased the quantity supplied by foreign producers falls.
- Increases price of the good
- Decreases consumption of the good
- Creates government revenue

Subsidies
- Subsidies lower production cost of firms and
therefore artificially increase their competitiveness. AS
a result, subsidies will decrease imports.
- This does not change the price of the good
- Increases domestic production of the good
- Lead to wasteful domestic production and
resource misallocation
- Leads to increased government spending

Exchange rates
- Depreciation
- Change in the domestic demand for imports
- As demand for imports increases so will supply of the currency since there will
be growing need to buy with it foreign exchange. This creates a current account
deficit creating pressure for the currency to depreciate.
- Change in the domestic demand for imports
- As demand for imports increases so will supply of the currency since there will
be growing need to buy with it foreign exchange. This creates a current account
deficit creating pressure for the currency to depreciate.
- Changes in relative growth rates
- In a growing economy demand for imports will rise causing currency to
depreciate.
- Changes in relative inflation rates
- Having inflation causes for prices to rise and for domestic firms to
become less competitive. This will cause for foreign demand for its
exports to decrease and so will the demand for its currency. Also
domestic demand for foreign products will increase causing for currency
to depreciate.
 - Changes in interest rates
- If interest rates decrease then domestic bonds as well as savings deposits
will be less attractive to foreign investors. As a result, not only will the
domestic currency become less attractive to foreign investors. This will
cause for the currency to depreciate.
- Appreciation
- Change in the foreign demand for a country's exports
- Growing exports implies that demand for the currency by foreigners will
be increasing. A current account surplus will be created as well as excess
demand for the currency which dens up putting pressure for the currency
to appreciate.
- Advantages of Appreciating CUrrency
- the price of imported consumer goods falls. The fall in the price of these goods
leads to an increase in the purchasing power of income
- Therefore an appreciating currency in the long term can improve the productivity
of domestic producers, lowering average total costs and increasing their
international competitiveness.
- Disadvantages of Appreciating CUrrency
- An appreciating currency reduces the price of imports leading to a fall in
inflation. However, the price of exports increases, leading to fall in quantity of
exports demanded and a rise in unemployment.
- Advantages of a Depreciating Currency
- the price foreigners pay for its exports falls making exports more price
competitive. This leads to an increase in the quantity of exports demanded.
Exporting producers increase output in response to higher demand and
unemployment falls.
- At the same time the price of imports increases, this leads to a fall in the quantity
of imports demanded and a rise in the quantity of domestic goods demanded.
- Aggregate demand increases, firms respond by increasing output and
unemployment falls. It is possible that a low exchange rate can help a country
recover from a recession.
- More income flows into the country to buy exports and less income flows out to
buy imports, leading to a fall in the current account deficit
- Disadvantages of a Depreciating Currency
- As a currency falls in value the price of imported consumer goods increases. The
price of imported resources also increases leading to an increase in the costs of
production leading to cost-push inflation.

Balance of payments
- Current account and exchange rates
- As the exchange rate falls, the price of imports rises but the price of exports falls.
 - So current account deficit creates pressure on the currency to depreciate whilst a current
account surplus puts pressure on the currency to appreciate.
- If a government tries to reduce the current account deficit by reducing the value of the
currency the policy will only be successful if PED X + PED M > 1. When PED X + PED
M < 1 reducing the value of the currency will increase the current account deficit.
- In the short run after a fall in the exchange rate PED X + PED M < 1 therefore the current
account deficit increases. In the long term PED X + PED M > 1 therefore the current
account deficit falls.

Terms Of Trade
- Improvement in the terms of trade occurs when the average price of exports increases relative to
the average price of imports. If the average price of exports increases relative to the average price
of imports, more imports can be bought with a given quantity of exports.
- Deterioration in the terms of trade occurs when the average price of imports increases in relation
to the average price of exports. If the average price of imports increases relatively to the average
price of exports, fewer imports can be bought with a given quantity of exports.

Distinguish between economic growth and economic development

- Economic growth is an increase in the real market value of goods and services produced by a
country in a given period of time. Whilst Economic development also takes into consideration
making better the living conditions of the population.