2.4.3 International trade


    Specialisation – When each worker completes a specific task in the production process.

    This can be achieved by individuals, businesses, regions of countries or countries themselves. Countries can specialise in the production of certain goods and can exploit their comparative advantage in a good. Absolute advantage is when a country can produce a more of a good with the same inputs. It makes them the most efficient producer and products are often of a better quality.

    Trade bloc – a group of countries that agrees to reduce/eliminate trade barriers between  members

    A free trade area is when two countries agree to trade goods with other members without protectionist barriers. Examples of this are the North American Free Trade Agreement (NAFTA) and the European Free Trade Agreement (EFTA). This allows members to exploit their comparative advantages which increases efficiency.


    A common market establishes free trade in goods and services, a common external tariff and allows free movement of capital and labour across borders. The EU was established as a common market, as EU citizens can work in any EU country.


    A monetary union shares the same currency, which also creates a common central monetary policy. They also share the same interest rates. The optimal currency zone is created when countries achieve real convergence. Member countries have to respond similarly to external shocks or policy changes. There has to be flexibility in product markets and labour markets to deal with shocks. This could be through the geographical and occupational mobility of labour, and wage and price flexibility in labour markets. Fiscal transfers could be used to even out some regional economic imbalances.

    Impacts of trade unions

    • Easier to access markets in member countries
    • Cheaper imports so higher disposable income for citizens as goods are cheaper due to lower costs of production
    • Encourages specialisation and opens up new markets
    • More competition in the market
    • Economies of scale can be exploited

    Economic growth can be seen through rising living standards, a rise in GDP and welfare systems:

    • It can be gained through economies of scale which lowers costs of production, increasing profit margins creating higher wages for employees who will spend their increased disposable income and therefore cause growth.
    • Trading surplus goods creates a variety of products in the market e.g. medicines, which leads to better welfare
    • Global output means that countries can specialise, and overall countries will have more access to better goods/services as comparative advantage benefits everyone.
    • There are also higher incomes from the increased disposable incomes as mentioned before which will be spent in the economy creating a rise in GDP and therefore leading to growth.

    Exports are positive in the balance of payments as they are an inflow of money whilst imports are negative in the overall balance as they are an outflow of money.


    Visibles – a physical good that can be handled such as the products of manufacturing most             commonly produced by the primary or secondary sectors e.g. cars


    Invisibles – an intangible import/export such as services. they are most commonly produced by the tertiary sector and include chipping, tourism and financial services.

    The balance of trade is the difference between the cost of imports and the profit made from exports, it is also referred as net exports. If exports are greater than imports there is a trade surplus whereas is imports are greater than exports there is a trade deficit.


    • Cheap imports could lead to a loss of jobs in the domestic market as producers will shift factories abroad where there is cheaper labour
    • The above can increase consumer choice in developed countries as goods are cheaper, meaning customers can buy more goods. If labour shifted back to the home country costs would increase and causing cost-push inflation.
    • Cheap imports cause lower inflation and more disposable income but also may cause unemployment to rise.
    • High dependence on imported goods suggests an unbalanced economy and results in a lower GDP as imports are a negative cashflow.
    • It also causes dependence on other economies, and this interdependence increases the economy’s vulnerability to external shocks and risk of spreading recession globally.


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