4.1 International Economics
Globalisation- the process by which economies have become increasingly integrated and independent, increasing level of
cross border trade, investment, and migration
Containerisation- a system of freight transport for use in sea shipping that has reduced the transport costs of shipping
1000s of goods across the globe
Multinational companies- has facilities and other assets in at least one country other than its home country
Transnational companies- TNC’s base their manufacturing, assembly, research and retail operation in a number of
countries
Trading bloc- a group of countries within a geographical region protecting themselves from imports and non-members.
Trade liberalisation- reductions in import tariffs and non- tariff barriers to enhance trade between one or more countries
FDI- the acquisition of a controlling interest in productive operations abroad by business resident in the home economy
Absolute advantage- occurs in the production of a good or service if it can produce it using fewer resources and at a lower
cost than another country.
Comparative advantage- occurs when a country can produce a good or service at a lower opportunity cost than another
country. This means they have to give up producing less of another good than another country, using the same resources.
Specialisation- when individuals, regions or countries concentrate on making one product to create a surplus
Terms of trade- an index that shows the value of a country’s average export prices relative to their average import prices.
= Index of average export prices/ index of average import prices *100
The prebisch – Singer hypothesis- observation states terms of trade between primary goods and manufactured products
deteriorates over time. Over the L/R the prices of primary goods decline in proportion to prices of manufactured goods
Closed economy- an economy operating without imports and exports
Free trade- -where trade occurs between countries without restrictions or barriers
Free trade agreements -when two or more countries in a region agree to reduce/eliminate trade barriers on all goods
from member countries
Customs union- a group of countries that abolish tariffs and quotas between member nations encouraging free movement
of G&S- adopt a common external tariff on imports from non-member countries. EU CU
Common market- single market for participating countries free trade in goods & services and free movement of labour
/capital. EU= single market
Monetary union- an intergovernmental agreement that involves 2 or more states sharing the same currency
Trade Creation- when trade is created by the joining of a trade union. Consumption shifts from a high cost domestic
producer to a low cost partner producer
Trade diversion- consumption shifts from a lower cost producer outside the trading bloc to a higher cost producer within
e.g. New Zealand butter vs European butter
,WTO- policies FTA decides on trade disputes between countries. Arranges negotiation to liberalise trade for member
countries by mutually agreed reductions in T & Q, opening domestic markets to foreign competition
Quota Limits -placed on the level of imports allowed into a country
Tariffs Taxes - placed on imported goods in an attempt to prevent people from buying them
Non-tariff barriers- trade barriers such as import quotas, embargoes, and export subsidies
Ad valorem tariffs- an import tariff rate charged as percentage of the price
Subsidy- payments by gov to domestic suppliers that reduce their costs- domestic output cheaper than imported goods
Dumping- where you export a good lower than the cost of production in the domestic country too
Protectionism- tariff and non- tariff restriction on imports to protect domestic produders
Expenditure reducing policies- policies designed to lower real incomes and AD and thereby cut demand for imports e.g.
higher direct taxes or increased I/R
Expenditure switching policies- policies designed to change relative prices of exports and imports. Depreciation
Financial account- transactions that results in change of ownership of financial assets/liabilities between residents of
different countries- net flows of money into equities, bonds, property
Financial flows- flows of capital across national borders including debt and equity
Portfolio investment – people/ businesses buy shares or other securities such as bonds in other nations.
Depreciation- a fall in the external value of one currency against another
Devaluation of currency- a fall in the external value of a currency inside a fixed exchange rate system
Revaluation of currency- an increase in the external value of currency inside a fixed e/r system
Fixed E/R- E/R fixed against other major currencies through action by gov/ central banks, within small margins of fluct
around central rate. Periodic intvnt in foreign exchange market by 1/ more CB– buy, sell currency if moves below/ above
margins
Floating exchange rate- external value of a currency depends on market forces of S&D. Only those currencies where
central bank interventions are limited to no more than 3 instances in the preceding 6 months
Managed floating- the value of the currency is determined by demand and supply but the Central Bank will try to prevent
large changes in the exchange rate on a day to day basis
Real E/R- the product of the nominal E/R and the ratio of prices between 2 countries
J curve effect- effect of a currency depreciation on the trade deficit depends on PED for exports and imports. The J curve
effect says a trade deficit can worsen after depreciation but
improve in the medium term if the ML condition holds
Marshall Lerner condition- predicts the circumstances in which a fall in E/R improves C.A on BOP. Devaluation improves
BoP ONLY if PEDX + PEDM > 1
,Causes of globalisation
Trade liberalisation- barriers to trade such as tariff barriers have decreased as countries have realised the benefits of free
trade in promoting growth by exploiting their comparative advantages. Promotes comp – increasing LRAS
Through the work of the WTO who’s main role is to reduce trade barriers between nations. Trade between countries
has increased- leading to greater economic integration between countries
Growth of trading blocs- this is where trading blocs like the EU and ASEAN have either deepened their integration or have
formed promoting more free trade and easier movement of labour between member states. Consequently more trade and
labour migration between these members is promoted and FDI is likely to increase leading to the greater integration of
these economies
Growth of multinational corporations (MNCs). As technology improves, mobility of capital is easier and access to world
markets is easier, MNCs can become very large in terms of production levels and profitability. Consequently to expand
further to international markets MNCs will move and operate in various countries leading to the greater interdependence
of nations in the form of increased FDI. Supernormal profits. Take advantage OF cheap labour costs
They have used marketing to become global, and by growing, they have been able to take advantage of economies of
scale, such as risk-bearing economies of scale. The spread of technological knowledge and economies of scale has
resulted in lower costs of production
Technological advancement- occurred in terms of internet improvements, software development and transportation
improvements in particular. Thus to trade internationally and operate business = more efficient= quicker- cheaper- opening
up markets increasing trade FDI and migration flows
Increased mobility of labour and capital- with the growth of trading blocs and the improvement in technology, labour and
capital mobility has become easier, quicker and cheaper. FDI has increased dramatically – large businesses setting up
around the world- migrations flows increasing as workers seek to maximise their earning potential
Fall In transport costs- occurred due to innovations and greater privatisation of transport. Cheaper and faster= promoting
more trade. FDI and migration flows have increased with this improvement in mobility both of labour and capital
Containerisation- This has resulted in it becoming cheaper to ship goods across the world- causes prices to fall, which
helps make the market more competitive. Containerisation means that goods are distributed in standard sized containers,
so it is easier to load and cheaper to distribute using rail and sea transport. This helps to meet world demand
How globalisation causes inequality:
Specialisation and trade. Cheaper to source materials from elsewhere, contraction in domestic supply and a fall in
employment and real incomes- structural u/e and a decline in SOL. Wages pressure- inequality. Deindustrialisation –
higher rates of long-term u/e social depravation
Higher profits from MNC’s – generous pay-outs to executives increasing dividends. Because of tax avoidance, tax
revenues generate- insufficient to pay for public services, welfare systems. UK 2017 MNC avoid paying £6 billion in tax
rev
Ev- country by country financial reporting
Increasing demand for high skilled workers and lowering the expected earnings of people in relatively low skill and
low knowledge occupations. FDI creates more formal employment and income for people employed in those sectors
but perhaps at the expense of similar workers in higher income countries whose skills are no longer in demand
1. One paradox of globalisation is that it has probably reduced inequality between countries but increased it within
nations
2. Role of the government is vital with globalisation- effectively redistributing tax revenues, tightening up measures on
tax avoidance, investing in education, apprenticeships, supply side policies, environmental policies, human capital and
entrepreneurship. Problem of regionalisation
,Pros of globalisation:
Increase in world efficiency- with greater free trade and specialisation, resources are allocated where countries have
their comparative advantage. Consequently, allocative efficiency is attained and with money to act as a means of
exchange, the basic economic problem is solves maximising benefit to both consumers and producers
Large economies of scale- larger international market to access, businesses have the potential to grow much larger
and sell to many more consumers around the world. With greater benefit from purchasing and technical economies
businesses will lower their average costs of production increasing productive efficiency. Lower costs translate into
higher profitability and potentially lower prices for the consumer
Increased competition and lower prices- fierce competition, producers do what they can to compete- allocative
efficiency and great benefit to the consumer through lower prices, higher quantity, quality, and choice. Businesses
may be forced to re-invest and be innovative – best quality of a diversified range
Increased choice for consumers and businesses- businesses can source raw materials from all around the world ,find
the cheapest prices. Similarly, consumers can access a greater market to buy their goods and services from.
Businesses benefit from lower costs of production- lower prices, greater market share, higher profitability,
consumers= welfare, material and non- material living standards can improve markedly
Higher rates of GDP growth- greater market size and specialisation – greater export potential and revenue generated
from exports for countries with large comparative advantages- AD and thus economic growth will increase.
Unemployment will decrease- firms respond by giving more labour- increasing incomes and living standards,
prosperity. Tax revenues hypothecated capital investment, public goods and merit goods, retraining programmes-
invest into supply side policies
Cons of globalisation:
Growing income inequality- higher growth may not be translated into higher incomes for all. Corrupt governments
who don’t redistribute tax revenue effectively, capital intensive sector production or from one dominant sector are all
potential causes of this widening gap. Thus key macro objective not met- increasing relative poverty and
deteriorating government finances. Developing nations- sig parts of the population may continue to live in absolute
poverty holding back economic development
Rise in structural unemployment- major industries go into decline- struggle to compete internationally where other
countries have the comparative advantage and low cost labour benefit- macroeconomic objective is lost.
Occupational immobility of these workers promotes a problem for the gov where re training is necessary. There’s a
cost to the gov directly but also indirectly – higher u/e benefits
Trade imbalances- levels of international debt have increased dramatically to fund C.A deficits. Countries are more
integrated and reliant on another a shock affecting one country having an impact on another- crises can spread
quickly. Persistent CA deficits
Environmental costs- with FDI increasing, growth etc, negative externalities increased e.g. very high pollution levels,
resource depletion, resource degradation and deforestation. Consequently, wellbeing and quality of life decrease. Not
sustainable
Over specialisation- exploiting comparative advantage, risk of becoming too over reliant on a narrow range of goods
and service. If the industry collapses or declines where specialisation has occurred no industry can prosper. In
developing nations, dual economy could persist trapping the economy in low levels of development
Greater risks of monopoly power and consumer exploitation – due to greater market sizer and higher barriers to
entry such as economies of scale and loyalty. Result in MNCs dominating markets and exploiting consumers through
higher prices and reduced output- reducing consumer surplus
International comp = fall in wages for low skilled workers in developed countries
Tax revenue is lost= tax avoidance from MNCs- combat this through global corporation tax rate. UK estimate is that
there is £6bn of corporate tax avoidance each year. The OECD estimated that between 4% and 10% of global
corporate tax revenues or between $100 billion and $240 billion, is lost each year due to tax avoidance
,Globalisation evaluation points
Is there fully functioning free trade? Whilst tariff barriers and quotas have been reduced, the greater spread of subsidies
and non-tariff barriers, particularly in agriculture, detriment of developing countries. The WTO has been successful in
increasing free trade in the manufacturing and service sectors where developed countries are dominant whereas poorer
countries, who are still reliant on the primary sector for exports and growth
The role of the government is pivotal. Globalisation by maximising the power of markets can be so powerful in increasing
growth rates and prosperity but this is not automatic for poverty reduction and income growth in all countries.
Governments have a crucial role to play in ensuring that higher incomes are taxed effectively and progressively where tax
revenue can then be re-distributed to the poor, reducing the income inequalities that globalisation can promote.
Efficient and effective environmental policy - prevent the destruction of the environment. Education schemes must be in
place for local workers to have human capital to take newly created jobs - working in sectors that are not natural for the
local population and do not necessarily match their innate skill set. Those who lose their job due to strong and more
efficient competition re-training to become occupationally mobile to transfer into other sectors.
The government must also make sure that infrastructure is developed to allow for the economy to fully benefit from
trade. Reducing trade barriers is not enough for the full benefits of trade to be realised if roads, railway lines and ports are
not suitable to accommodate the volumes of goods and services that international trade demands.
Tempting for countries to trap themselves in the resource curse and not develop other sectors of the economy when
globalisation = huge revenue generation from the primary sector- dangerous for developing countries who are prone to
slumps in primary commodity markets, resource depletion and recessions abroad. Government to encourage
diversification - companies or entrepreneurs to enter the manufacturing sector where greater value-added production
takes place /incomes are higher, breaking the resource curse that can trap developing countries in poverty cycles and low-
level development. Countries that have diversified better income, living standards and sustained growth.
Managed Globalisation? Countries can accept globalisation in different ways; operating themselves up trade, FDI,
migration and short-term financial flows.
For example, China and India opened up their economies to trade and FDI but rejected the short-term speculative
flows of finance that create unsustainable bubbles and volatility in the economy. The risk of suffering from both
internal and external shocks is much greater by opening up financial markets in this way when countries are not ready
for it, which led to economic crisis in South American countries like Argentina, various African countries and the
Caribbean Islands.
Economic growth:
Globalisation increases investment within countries; the investment of TNCs represents an injection into the
economy, larger impact due to the multiplier. It creates an incentive for countries to make supply-side
improvements to encourage TNCs to operate in their countries.
TNCs may bring world class management techniques and technology which can have knock on benefits to all
industries as these techniques and technologies are available for them too.
Trade will increase output since it allows exploitation of comparative advantage.
However, the power of TNCs can cause political instability as they may support regimes which are unpopular and
undemocratic but that benefit them or could hinder regimes which don’t support them
Comparative cost advantages will change over time and so companies may leave the country when it no longer
offers an advantage which will cause structural unemployment and reduce growth.
,International trade:
A country has absolute advantage in the production of a good or service if it can produce it using fewer resources and at a
lower cost than another country. Produce a good more cheaply relative to other countries
Comparative advantage occurs when a country can produce a good or service at a lower opportunity cost than another
country. This means they have to give up producing less of another good than another country, using the same resources.
A country can change over time e.g. due to greater research and development and innovation in newer and more
sophisticated techniques providing a country with lower cost advantages.
Can gain a comparative advantage due to either greater quantities of factors of production or better quality
factors of production e.g. greater abundance of natural resources, labour, machinery.
Country with higher skilled labour force- comparative advantage in manufactured goods. Country with a natural
resource endowment and good climate- adv. in primary commodity extraction.
Comparative advantage evaluation:
Comparative advantage theory assumes perfect information for both producers and consumers. If consumers
however lack information of where the cheapest goods are being produced, they may buy from an inefficient producer
allowing these businesses to survive and be profitable.
Transport costs are assumed to be zero, which clearly does hold in the real world. Large transport costs may erode a
country’s comparative advantage and make it cheaper to import goods from a less efficient producer located closer.
Comparative advantage assumes no economies of scale advantages. In reality even, countries without a comparative
advantage can set up large scale production of a good or service purely to benefit from economies of scale as output
increases which can allow them to compete with countries with a comparative advantage and perhaps overtime take
over the comparative advantage in production.
Countries without the comparative advantage may be able to afford expensive research and development spending
allowing for patentable products to be made giving firms the advantage despite not being the most efficient producer.
Comparative advantage ignores the impact of exchange rate changes. For example, a country with a comparative
advantage will lose out to another less efficient producer if their exchange rate strengthens. The other country will
benefit from more competitive exports, eliminating a
Comparative advantage cost difference, and thus can be successful despite not being as efficient.
High inflation rates over time can erode the price competitiveness of goods and services produced in countries with a
comparative advantage. If this persists in the long run, the comparative advantage might be lost.
Protectionist measures such a as tariff and quotas can be used by gov in countries without comparative advantage to
inflate the price of imports from countries with the comparative advantage providing domestic producers with an
artificial advantage in the market
Countries without the comparative advantage may be highly non price competitive. This is because these countries
might have focused more on service quality, branding, advertising, product longevity. Realising that consumers do
not only consume based on price but non price factors, less efficient producers can still be profitable without the
comparative advantage.
,Advantage and disadvantages of specialisation and trade:
Advantages:
Comparative advantage shows how world output can be increased if countries specialise in what they are best at
producing, this will increase global economic growth.
Trading and specialising allows countries to benefit from economies of scale , which reduces costs and therefore
decrease prices globally.
Different countries have different factors of production and so trade allows countries to make use of factors of
production, or the things produced by these factors, which they otherwise may have been unable to.
Trade enables consumers to have greater choice about the types of goods they buy, and so there is greater consumer
welfare.
Trade also means there is greater competition, which provides an incentive to innovate. This creates new goods and
services and new production methods, increasing consumer welfare and lowering costs respectively.
Countries which isolate themselves for political reasons, like North Korea, have found that their economies tend to
stagnate.
Disadvantages:
However, trade can lead to over-dependence, where some countries become dependent on particular exports whilst
others become dependent on particular imports. This can cause problems if there are large price falls in the exports of
if imports are cut for political reasons= economy can collapse
It can cause structural unemployment, as jobs are lost to foreign firms who are more efficient and competitive. The
less mobile the workforce, the higher the chance that changes in demand due to trade will reduce output and
employment over long periods of time- problem in the UK as some areas such as Manchester suffer from
unemployment as their traditional industries declined, for example ship-building.
The environment will suffer due to the problems of transport as well as the increased demand for resources e.g.
deforestation.
Countries may suffer from a loss of sovereignty due to signing international treaties and joining trading blocs, for
example in the EU.
They may see a loss of culture as trade brings foreign ideas and products to the country.
Patterns of trade
Factors influencing patterns of trade
Comparative advantage: Countries will trade where there is a comparative advantage to trading. A change in the
comparative advantage- affect the trade pattern. There has been a recent growth in the exports of manufactured
goods from developing countries to developed countries. Their share of world trade has risen and the volume of
manufactured goods that they export has increased. However, since China’s population is now ageing, their wage
competitiveness has fallen- due to the rise of the middle class in China, demand higher wages and consume more.
Emerging economies: Countries grow at different rates and when they grow, they are likely to need to import more
goods and services than before as well as exporting more to pay for this. Emerging economies shift the trade
pattern by taking up a larger proportion of a country’s imports and exports than they had previously. The collapse
of communism has meant that more countries, especially developing countries, are participating in world trade.
Trading blocs and bilateral trading agreements: These increase the level of trade between certain countries and so
influence the pattern of trade because trade increases between these countries and decreases between others.
Joining the EU meant that the UK traded a lot more with European countries than previously, and less with countries
outside the EU.
Relative exchange rates: The exchange rate affects the relative prices of goods between countries. A change in price
will affect the pattern of trade. It can be argued that the UK’s trade deficit with Europe is due to the strength of the
pound. China have kept their currency weak in order to increase their trade surplus by making exports more
competitive.
,Terms of trade
Terms of trade- an index that shows the value of a country’s average export prices relative to their average import prices.
It’s an indicator of the level of imports a given basket of exports can buy calculated using this equation:
Terms of trade= index of average export prices/ index of average import prices *100
The terms of trade can worsen if export prices fall or if import prices rise; the terms of trade can also improve if export
prices rise or if import prices fall
Movement in the terms of trades is said to be favourable if the terms of trade increase as the country can buy more
imports with the same level of exports.
Factors influencing a country’s terms of trade:
An improvement in the terms of trade will be caused by a rise in export prices or a fall in import prices. A
deterioration will be caused by a fall in export prices or a rise in import prices.
In the short run, exchange rates, inflation and changes in demand/supply of imports or exports affect the terms of
trade since these affect the relative prices of imports and exports.
In the long run, an improvement in productivity compared to a country’s main trading partners will decrease the
terms of trade since export prices will fall relative to import prices. This can be caused by new technology, more
efficient labour etc.
Another long run factor is changing incomes. This affects the pattern of demand for goods and services. For
example, a rise in world income causes a rise in demand for tourism and so a country with a strong tourist industry,
such as Spain, may see a rise in prices in that industry and hence an increase in their terms of trade. The Prebisch-
Singer hypothesis suggests the long run price of primary goods declines in proportion to manufactured goods, which
means those dependent on primary exports will see a fall in their terms of trade.
In general, anything which affects the price of a country’s imports or exports will affect its terms of trade.
Reasons for deterioration in the terms of trade:
A weak exchange rate- this could be because of the currency is increasing as the nation is purchasing more imports.
Consequently, the price of imports increases whilst the price of exports decreases worsening the terms of trade- more
exports need to be sold to purchase the same level of imports
An improvement in international competitiveness- could be because of a fall inflation, rise in productivity, tech. export
prices will fall relative to import prices, worsening terms of trade
Lower demand for a nation’s exports- could be because of falling incomes abroad as economies of major trading
partners in recession- export prices will fall relative to import prices worsening the terms of trade
If world incomes are rising but a country is specialising in the production and export of primary commodities whilst
importing capital or manufactured goods. Demand for primary commodities is income inelastic whilst demand for
manufactured goods is income elastic. Consequently, world incomes would rise, demand and thus prices for manu
goods will rise faster than demand and prices for primary commodities worsening the terms of trade for such a
country; prebisch- singer hypothesis
Reasons for an improvement in the terms of trade:
A strong exchange rate
A worsening in international competitiveness
Higher demand for a nations export- could be because of rising incomes abroad as economies of major trading
partners boom. Export prices will rise relative improving terms of trade
,Impacts of changes:
If PED of exports and imports is inelastic, a favourable movement in terms of trade would improve the CA on the
balance of payments whilst if it is elastic, a favourable movement would worsen the CA.
An improvement in the terms of trade - fall in GDP and a rise in U/E, if it is caused by a rise in export prices, exports
will fall and if it is caused by a fall in import prices, imports will rise- A reduction in production within the country =
fall in jobs and output. However, a long-term decline in the terms of trade suggests a long-term decline in SOL as
less imports can be bought.
Cause of the change. If an improvement has occurred due to increased demand for exports, then this will be
beneficial for the country. If a deterioration is caused by an improvement in international competitiveness, this will
also be beneficial. For an improvement to be beneficial, export revenues must increase.
1. A fall in the terms of trade caused by a fall in export prices for a country dependent on primary commodities could
reduce AD in the economy- demand for primary commodities is price inelastic - prices fall so do revenue generated
from their export for developing countries= economic growth will fall in developing countries reducing incomes and
SOL via a fall in gdp
2. A fall in the terms of trade could significantly worsen the government budget position. As export prices fall and
demand is inelastic, revenues decrease, reducing tax revenue collected from corp tax, income tax and VAT.
Consequently, gov will have less revenue to spend on education, healthcare, infrastructure- for the long run
performance
3. A developing nation likely to experience higher levels of indebtedness. If export prices fall so do revenue- harder to
service existing debt.
Is a terms of trade improvement good for an economy? Depends on the cause
Higher export demand, improving the terms of trade via higher export prices, beneficial, export revenues increases
improving CA position and thus increasing AD
THE price elasticity of demand for exports . Price inelastic demand, export price increases, demand for exports
decrease but proportionately less than price increase. Export rev increase increasing CA position and boosting AD.
However growing force of globalisation means in reality there are many substitutes available for an importing
country. Demand for a country’s exports will be more elastic over time worsening CA position and AD
Evaluation. Is a terms of trade deterioration bad for an economy
Lower export demand- worsening terms of trade, export rev decreases – AD reduces
Price elasticity of demand for exports-
, Trading blocs and the world trade organisation
Types of trading blocs:
A regional trading bloc is a group of countries within a geographical region that protect themselves from imports
from non-members.
They sign an agreement to reduce or eliminate tariffs, quotas and other protectionist barriers among themselves.
Examples include NAFTA (North America), the EU, ASEAN (Asia) and MERCOSUR (South America).
Most regional trade agreements take the form of bilateral agreements, between one single country and another
single country. Some agreements are multilateral or plurilateral agreements, between at least three countries.
Preferential trading areas (PTA): These are where tariff and other trade barriers are reduced on some but not all
goods trade between member countries.
Free trade areas (FTA): These occur when two or more countries in a region agree to reduce or eliminate trade
barriers on all goods coming from other members. Each member is able to impose its own tariffs and quotas on
goods it imports from outside the trading bloc.
Customs unions: A customs union involves the removal of tariff barriers between members and the acceptance of a
common external tariff against non-members. This means that members may negotiate as a single bloc with third
parties such as other trading blocs or countries.
Common market: This establishes free trade in goods and services, a common external tariff and allows free
movement of capital and labour across borders. When the EU was established, it was a Common Market. EU citizens
can work in any country in the EU.
Monetary unions, including conditions necessary for their success:
This is sometimes called a currency union. Members of a monetary union share the same currency. This is more
economically integrated than a customs union and free trade area. The Eurozone is an example of this.
A common central monetary policy is established when a monetary union is formed. The single European currency,
the Euro, was implemented in 1999 to form the Eurozone.
Monetary unions use the same interest rate. The Euro, for example, floats against the US Dollar and the Pound
Sterling. An economic union is the final step of economic integration. There will be a common market with
coordination of social, fiscal and monetary policy.
Advantages of a trading bloc:
Encourages specialisation (resources are allocated where countries have a comparative advantage + economies of
scale (productive efficiency, lower average costs- profitability
Greater competition domestically-removal of barriers- encouraging innovation , lower prices-=productive and
allocative efficiency- increase in world efficiency
Firms may be able to grow much larger by creating a larger customer market- may be difficult given different
customer markets in different countries. Economies of scale will be increased
Firms inside the bloc are protected from cheaper imports from outside, for example those in the EU are protected
from Chinese imports.
Greater choice for consumers- welfare increase
Creates employment opportunities, if leads to an increase in output
Disadvantages of a trading bloc:
Inefficient producers within the bloc are protected from efficient producers outside the bloc= trade diversion
consumers lose out e.g. zombie firms
Less national sovereignty. Loss of resources, most successful countries will attract capital and labour. Regional ineq
Reduction in competition as inefficient firms are driven out of the business – monopoly power. market –
oligopolistic
Retaliation as the creation of one regional trading bloc - lead to creation of others = can lead to trade disputes.
Countries are no longer able to benefit from trade with countries in other blocs- blocs likely to distort world trade,
reducing benefits of specialisation.
