MACROECONOMICS – INTERNATIONAL TRADE & GLOBALISATION ANALYSIS CHAINS

This chapter is VERY common in Paper 4.

Especially:

• free trade

• protectionism

• customs unions

• free trade areas

• exchange rates

• balance of payments

• globalisation

• trade deficits

• competitiveness

Examiners LOVE evaluation here because trade questions are full of:

• advantages vs disadvantages

• short-run vs long-run

• developed vs developing countries

• consumer vs producer impact

FREE TRADE CHAIN

• Trade barriers removed

• Imports and exports increase

• Competition rises

• Efficiency improves

• Consumer choice expands

• Prices may fall

• Consumer welfare improves

• Economic growth may rise

Evaluation:

• domestic firms may collapse

• unemployment may rise short-run

• developing industries may struggle

PROTECTIONISM CHAIN

• Government imposes tariffs/quotas

• Imports decrease

• Domestic firms gain market share

• Employment may rise

• Infant industries protected

Evaluation:

• prices rise for consumers

• inefficiency may increase

• retaliation may occur

• consumer choice decreases

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

TARIFF CHAIN

• Government imposes import tax

• Import prices rise

• Import demand falls

• Domestic firms sell more

• Government gains revenue

• Trade deficit may reduce

Evaluation:

• inflationary pressure possible

• retaliation risk exists

• smuggling/black markets possible

QUOTA CHAIN

• Government limits quantity of imports

• Supply of imports restricted

• Prices rise

• Domestic producers benefit

• Consumer welfare falls

Evaluation:

• no government revenue unlike tariff

• corruption possible in quota allocation

SUBSIDY FOR EXPORTS CHAIN

• Government subsidises exporters

• Production costs fall

• Exports become more competitive

• Export demand rises

• Employment and output increase

Evaluation:

• expensive for government

• may violate trade agreements

• retaliation possible

FREE TRADE AREA CHAIN

• Member countries remove trade barriers

• Trade between members rises

• Competition increases

• Efficiency improves

• Consumer prices may fall

Evaluation:

• countries keep separate external tariffs

• trade diversion possible

• weaker economies may struggle

CUSTOMS UNION CHAIN

• Countries remove internal tariffs

• Common external tariff introduced

• Trade between members rises

• Trade creation may occur

• Economic integration strengthens

Evaluation:

• sovereignty reduced

• trade diversion possible

• non-members disadvantaged

TRADE CREATION CHAIN

• Inefficient domestic production replaced

• Imports from efficient member countries rise

• Consumer prices fall

• Consumer welfare improves

• Efficiency increases

Evaluation:

• depends on comparative advantage

• domestic unemployment possible

TRADE DIVERSION CHAIN

• Imports shift from efficient non-member country

• Less efficient member country supplies goods

• Consumer prices may rise

• Welfare loss may occur

Evaluation:

• political integration benefits may still exist

• short-run vs long-run effects differ

COMPARATIVE ADVANTAGE CHAIN

• Countries specialise in lower opportunity cost goods

• Efficiency increases

• Output rises

• Trade expands

• Living standards improve

Evaluation:

• over-specialisation risky

• changing comparative advantage possible

• developing countries may remain dependent on primary goods

ABSOLUTE ADVANTAGE CHAIN

• Country produces goods more efficiently

• Costs lower

• Output expands

• Trade competitiveness improves

Evaluation:

• comparative advantage more important for trade theory

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

EXPORT INCREASE CHAIN

• Foreign demand rises

• Exports increase

• Aggregate demand rises

• Output and employment rise

• Economic growth strengthens

• Trade balance improves

Evaluation:

• depends on world economic conditions

• exchange rate changes matter

IMPORT INCREASE CHAIN

• Consumers buy more imports

• Domestic demand leaks abroad

• Net exports fall

• Aggregate demand decreases

• Domestic growth weakens

Evaluation:

• imports may provide cheaper inputs

• consumers gain greater choice

CURRENT ACCOUNT DEFICIT CHAIN

• Imports exceed exports

• Current account deficit develops

• Net exports negative

• Aggregate demand decreases

• Economic growth slows

• Foreign borrowing may increase

Evaluation:

• deficit may reflect strong economy

• foreign investment may finance deficit sustainably

CURRENT ACCOUNT SURPLUS CHAIN

• Exports exceed imports

• Current account surplus develops

• Foreign currency earnings rise

• Economic growth may strengthen

Evaluation:

• may reflect weak domestic demand

• trading partners may retaliate

EXCHANGE RATE APPRECIATION CHAIN

• Currency value rises

• Exports become more expensive

• Export demand falls

• Imports become cheaper

• Trade balance may worsen

• Inflationary pressure decreases

Evaluation:

• depends on PEDX/PEDM

• imports of raw materials become cheaper

EXCHANGE RATE DEPRECIATION CHAIN

• Currency value falls

• Exports become cheaper

• Export demand rises

• Imports become more expensive

• Aggregate demand rises

• Economic growth may increase

Evaluation:

• imported inflation may rise

• Marshall-Lerner condition important

• J-curve effect possible

MARSHALL-LERNER CONDITION CHAIN

• Currency depreciates

• Export demand and import demand respond strongly

• Export revenue rises

• Import expenditure falls

• Trade balance improves

Evaluation:

• only works if PEDX + PEDM > 1

• adjustment takes time

J-CURVE EFFECT CHAIN

• Currency depreciates

• Import prices rise immediately

• Export volumes adjust slowly

• Trade balance worsens initially

• Eventually exports rise

• Trade balance improves later

Evaluation:

• depends on elasticity

• global demand conditions matter

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

GLOBALISATION CHAIN

• International trade and investment increase

• Multinational corporations expand

• Competition rises

• Technology transfer occurs

• Productivity increases

• Economic growth rises

Evaluation:

• inequality may worsen

• environmental damage possible

• domestic firms may collapse

FOREIGN DIRECT INVESTMENT CHAIN

• MNC invests abroad

• Capital inflow increases

• Employment rises

• Technology transfer occurs

• Productivity improves

• Economic growth strengthens

Evaluation:

• profits may leave country

• dependence on MNCs possible

MULTINATIONAL CORPORATION CHAIN

• MNC enters developing country

• Jobs created

• Output rises

• Tax revenue may increase

• Infrastructure may improve

Evaluation:

• exploitation concerns

• environmental damage possible

• local firms may struggle

TRADE LIBERALISATION CHAIN

• Trade barriers reduced

• Competition rises

• Firms improve efficiency

• Consumer welfare improves

• Economic growth increases

Evaluation:

• structural unemployment may occur

• infant industries may fail

PROTECTION OF INFANT INDUSTRIES CHAIN

• Government protects new industries

• Firms gain time to grow

• Economies of scale develop

• Competitiveness improves

Evaluation:

• firms may become inefficient

• protection may continue too long

DUMPING CHAIN

• Foreign firms sell below cost

• Domestic firms struggle

• Market share lost

• Domestic unemployment may rise

Evaluation:

• consumers gain lower prices short-run

• anti-dumping measures possible

COMMON PAPER 4 EVALUATION POINTS FOR TRADE ESSAYS

Always use:

• PEDX and PEDM

• retaliation risk

• short-run vs long-run

• developed vs developing economies

• consumer vs producer impact

• competitiveness

• inflationary pressure

• unemployment effects

• trade creation vs diversion

• global economic conditions

PERFECT TRADE ANALYSIS FORMULA

TRADE/POLICY CHANGE
→ EXPORTS/IMPORTS CHANGE
→ AD CHANGE
→ OUTPUT & EMPLOYMENT EFFECT
→ TRADE BALANCE EFFECT
→ LONG-RUN COMPETITIVENESS
→ EVALUATION

ULTRA IMPORTANT EXAM CHAIN

Tariffs imposed
→ import prices rise
→ import demand falls
→ domestic firms gain market share
→ employment may rise
→ consumer prices increase

Evaluation:

• retaliation may reduce exports

• inefficiency may increase

• consumer welfare falls

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

BIGGEST INTERNATIONAL TRADE MISTAKE

Students only explain “advantages of free trade.”

Weak.

Strong Paper 4 analysis:
“Free trade may increase efficiency and consumer welfare through greater competition and specialisation, although domestic firms may struggle against foreign competition causing structural unemployment depending on labour mobility and government support.”

THAT is A-grade Paper 4 evaluation and analysis.