1. International trade Learning outcome AE
Explain the reasons for international trade
Define free trade
Explain the benefits of free trade
Explain the theory of comparative advantage using a numerical example
Explain the methods of protectionism
Evaluate protectionism
Explain, with the aid of price-quantity diagrams, the reasons for changes in the value of currency in a floating exchange rate system
Reading: Units 14, 39 & 40

2. International trade There are a number of reason for trade including:
Availability- some goods can only be produced in certain countries i.e. oil, diamonds
Product differentiation- provides more choice for consumers
Price- some countries can produce goods relatively cheaper than others (absolute and comparative advantage)

3. Absolute advantage
When a country is able to produce a good more cheaply in absolute terms than another country

4. Absolute advantage (example)
Cost per unit (worker hours)
Italy
France
Oranges 10 15
Wine 20
Italy can produce one unit of oranges cheaper than France
France can produce one unit of wine cheaper than Italy
If France produce wine and Italy oranges and they trade they will both be better off

5. Comparative advantage
When a country is able to produce a good more cheaply relative to other goods produced domestically than another country

6. Comparative advantage (example)
Cost per unit (worker hours)
Italy
France
Oranges 20 15
Wine 25 10
France produces wine and oranges cheaper than Italy
Italy however is less worse at producing oranges
If France produce wine and Italy oranges and they trade they will both be better off

7. Free Trade
International trade conducted without the existence of barriers to trade

8. Benefits of free trade Specialisation
The theory of comparative advantage shows that two counties are better off if they trade, if all countries engage in trade then the world will be better off (greater output)
Economies of scale
If countries specialize then they can achieve greater economies of scale and increase their comparative advantage in production of certain goods

9. Benefits of free trade Choice
Trade provides consumers with greater choice and they are therefore better off
Innovation
Free trade creates competition which leads to innovation as firms have to compete against companies from all over the world

10. Promotion of Free Trade
International organisations such as the World Trade Organisation (WTO) promote free trade between nations
They work to reduce or remove trade barriers and promote freer international trade