ACJC International Trade Lecture Notes

©ACJC Econs Dept/2024/International Economics 1 ANGLO-CHINESE JUNIOR COLLEGE JC2 Economics H2 INTERNATIONAL TRADE Section A: TRADE POLICY DECISIONS AND THEIR IMPACT ON THE ECONOMY 1. FREE TRADE PAGE 1.1 Theory of Comparative Advantage 5 1.2 Terms of Trade 8 1.3 Dynamic Comparative Advantage 10 1.4 Benefits of Free Trade 16 2. ECONOMIC CO-OPERATION & FREE TRADE AGREEMENTS 2.1 Economic Integration (Free Trade Agreements, Regional Trade Agreements) 14 2.2 Arguments for FTAs 15 2.3 Arguments against FTAs 16 3. TRADE RESTRICTIONS (PROTECTIONISM) 3.1 Arguments for Protectionism 19 3.2 Types of Protectionism 22 3.3 Arguments against Protectionism 26 4. TRADE POLICIES 4.1 Expenditure-Reducing Policies 27 4.2 Expenditure-Switching Policies 28 4.3 Supply-Side Policies 30 Section B: GLOBALISATION AND ITS IMPACT ON THE ECONOMY 1. DEFINITION OF GLOBALISATION 31 2. FACTORS DRIVING GLOBALISATION 31 3. BENEFITS OF GLOBALISATION 32 4. COSTS OF GLOBALISATION 33 ANNEX: 1. Pattern of Trade 2. Singapore’s Pattern of Trade 3. World Trade Organisation & Singapore’s FTA Network 39 Textbook References: 1. Principles of Economics, Case, Fair & Oster, Ch 34 pg 697-702, 705-710 2. Principles of Macroeconomics, An Asian Edition, Mankiw, Quah & Wilson, Ch 31 pg 702 -711, Ch 32 pg 733-746 3. Principles of Macroeconomics , O’Sullivan, Sheffrin, Lim & Seevaratnam, Ch 29 pg 778 -820;

©ACJC Econs Dept/2024/International Economics 2 WHAT IS THIS TOPIC ABOUT? International trade allows countries to focus on the industries in which they can be most productive and efficient. In this way, free trade often raises the standard of living of both producers and consumers. International trade offers many benefits to countries: • They can increase their aggregate demand and increase national income through exports, and they can obtain goods that they cannot produce or are inefficient in, through imports. • Free trade promotes mutual benefits to countries, in terms of greater efficiency in production and use of resources, as well as improvements in economic growth and standard of living. In the real world, however, free trade may pose macroeconomic problems to trading countries. • Failure to keep up with rising competitiveness of trade partners, for example, can cause a country to lose its export competitiveness and face the problems arising from worsening trade balance, slowing economic growth and rising unemployment. • Countries may therefore resort to using tariff and non-tariff barriers to restrain the entry of imports into their domestic markets in order to achieve greater macroeconomic stability. Although free trade offers economic benefits, and protectionism leads to economic costs in various forms, the latter may exist in countries’ trade policies in varying degrees. LEARNING OUTCOMES Enduring Understanding: • Although free trade offers economic benefits, it also exposes countrie