Absolute Advantage

1. Absolute Advantage International trade • The Law of Absolute Advantage states that each country should specialise in the production of that good in which it has absolute advantage (which they can produce cheaper / use less resources)

2. Comparative Advantage • The Law of Comparative Advantage If a country is more efficient in producing both goods it should specialise in the good where it has the greater relative advantage and trade for its other goods.

3. Law of Comparative Advantage

4. Law of Comparative Advantage Assumptions • Sources of Comparative Advantage • Food – some countries land / climate allows them to have a comparative advantage e.g. Ireland’s Dairy Products. • Skills of the Workforce & Attitudes to work (Highly skilled & Educated) • Low Wages e.g. textile industry • Plenty of Capital • Governments may create Comparative Advantage e.g. US Defence Airplane / Space Exploration.

5. In the above situation both countries don’t engage in International Trade Country Y is better at producing both goods. This doesn’t mean it should produce both goods and County X should Produce nothing. Country Y is four time better at producing Food than X (20/5)and Three times better at producing Machinery than X (30/10) Country Y is relatively more efficient at producing food. Y should produce Food and leave X produce Machinery

6. Construct a New table after specialisation and Trade takes place • Use Percentages to show the change in Total Output. 20 less Machines (50%) are produced and 15 more tonnes of food are produced (60%) • Because 60% increase is better than the 50% decrease , both countries are better off from trading.

7. Terms of Trade = tells economists the amount of imports that can be purchased with one unit of exports • * 100

9. With Specialisation

10. 10/30 * 100 20/100 * 100

12. Benefits of Imports • Purchase goods not available at home e.g. bananas • Wider choice (increased standard of living) • Lower Prices (More competition) • Businesses have access to essential raw materials, e.g. Oil • Some goods too expensive to produce ourselves e.g. Airplane manufacturing (huge capital expenditure) • Money is leaving the country, leakage of National Income • Competition from abroad causes Irish firms to close down therefore Redundancies. • Increased Government spending due to Increased Unemployment Drawbacks of Imports

13. Benefits of Exports • Creates Employment – increased production • Money Inflows – Injection into Irish Economy (Wealth & Economic Growth) • Access to Larger Markets, therefore more consumers, increased sales and profits, (Economies of Scale) • Increase in Investment (Due to increase in exports firms may have to expand) • Export – led growth = even if home market is in downturn , firms may increase sales & economic activity leading to an increase in activity here.

14. Protectionism(Government Intervention) • Efforts by a government to restrict free trade and in particular imports. Reasons • To protect Irish Jobs (if consumers buy imports instead of Irish Goods, jobs at home may be lost) • To Protect Irish firms from competition from imports produced in low wage economies – e.g. China (no minimum wage0 • Political Reasons – USA doesn’t import or export from Cuba • To prevent Dumping (goods from a country are sold abroad at a lower price than the price charged for them at home) • To reduce the balance of payments Deficit = more imports than exports(more money leaving country than comes in) • To allow a new industry grow (new industry may need protection in first few years to allow to expand.

15. Barriers to Trade – to reduce import

16. Balance of Payments • Visible Exports = physical goodsleaveand money flows into the economy e.g. Beef. • Invisible Exports = foreigners use Irish services and money flows in. E.g. u2 playing concert in Wembley, American Holidaying in Ireland. • Visible Imports = physical goods come in and money flows out of the economy = cars • Invisible Imports = Irish people use the services provided by foreign owned firms and money flows out, e.g. Duran Duran playing in Dublin and Irish holidaying in Spain

17. Balance of Trade • Visible Exports minus Visible Imports (Exports always before Imports – “e” before “i” in alphabet) Balance = Surplus or Deficit Balance of Invisible Trade • Invisible Exports minus Invisible Imports (Exports always before Imports – “e” before “i” in alphabet)

18. Balance of Payments on the Current Account • (Visible Exports – Visible Imports) + (Invisible Exports – Invisible Imports) Or Visible Balance + Invisible Balance Or Total Exports – Total Imports The Word Current indicates money is flowing into or out of the economy on a continuous basis during the year.

19. Balance of Payments on the Capital Account • This is a record of our receipts (inflows) and payments (outflows) of capital items • Capital = Once off nature • E.g. Receipts = Foreigners buying Irish Property, Foreigners buying shares in Irish companies • E.g. payments = Irish people buying property abroad and shares in foreign companies

20. Surplus or Deficit If Exports > Imports = Surplus for all the previous • This is Good If Imports > Exports = Deficit • This is Bad Ireland BOP = SURPLUS of €127 Million EUR FOR 2011 • Ireland exports: agri-food, cattle, beef, dairy products, zinc, lead and aluminium. • Ireland’s major imports : data processing equipment, chemicals, petroleum and petroleum products, textiles and clothing. European Union is by far its largest trading partner, accounting for about 74% of exports and 60% of imports. Other major partners are U.S. and China.

21. Dealing With a BOP Deficit (Current A/C) • Reduce Imports e.g. through tariffs, quotas etc. (Limited by EU) • Import Substitution (buy Irish) • Encourage Exports – subsidies, tax relief, trade fairs • Government could pursue a deflationary policy – increase taxation & reduce government spending would reduce money available for imports (also affect demand and unemployment) • Last resort = devalue the currency (reducing its value in terms of other countries)