ACJC_H2_ECONS_P2_essay_Q6_answer

6. US has embarked on protectionist policies by imposing high tariffs on imports from China and EU to reduce its trade deficit and unemployment as its economic growth continues to pick up. a) Explain why an economy’s pattern of trade might change over time. [10] Approach to Question 6a: • Explain what is meant by pattern of trade • Explain how comparative advantage principle explains an economy’s pattern of trade • Analyse the factors that can lead to change in an economy’s pattern of trade using relevant examples Introduction Pattern of trade refers to the direction, volume and composition of trade between countries. Composition of trade refers to what is being exported or imported, while volume of trade refers to the real value of goods and services that is being exchanged. Lastly, direction of trade refers to the direction of exports and import flows. Body: • Change in pattern of trade due to change in comparative advantage (Supply factor) o One factor that causes a change in an economy’s pattern of trade is the change in its comparative advantage. According to the principle of comparative advantage, a country should specialise in the good it has comparative advantage in, i.e. the good it can produce at lower opportunity cost than its trading partners, ceteris paribus. o Change in comparative advantage can be due to changes in factor endowment, technological advancement and government policies. - A change in an economy’s pattern of trade due to changes in its or its trading partner's state of technology . The US, for example, may have lost its CA on manufactured products due to China's rapid technological development and advancement enabling China to produce some manufactured goods at lower opportunity cost than its trading partners. - Government policies to encourage the development of certain industries can also change the economy’s pattern of trade. China's government policies in subsidising firms in its manufacturing industry to innovate and develop new technology advancement has helped to change the economy’s pattern of trade from being a export of cheap labour-intensive manufactured goods to being an exporter of high-end manufactured goods. - China's rising number of highly skilled and efficient workers has led to rising productivity and hence the ability to produce high quality goods at lower opportunity cost than its trading partner, making it an exporter of higher end manufactured goods instead of being largely an importer in precious years. • Changes in demand preferences (demand factor) Increase in economic growth is a factor that can change an economy’s pattern of trade. For China, the high economic growth in the last decade or so has led to a rising number of middle income earners, hence rising affluence and changing lifestyles. The higher income group has changed the economy’s consumption pattern in favour of high-end branded luxury goods

e.g. the luxurious Merced