Unit 1 Business Environment Lecture Note Nine

AIM
The aim of this unit is to provide learners with an understanding of different organisations, the influence of stakeholders and the relationship between businesses and the local, national and global environments.
UNIT ABSTRACT
Organisations have a variety of
LEARNING OUTCOME
On successful completion of this lecture a learner will:
LO.4: Be able to assess the significance of the global factors that shape national business activities
UNIT LESSON PLAN–This is crucially following the actual unit contents, otherwise known
as Assessment Criteria (AC).
This lecture will attempt to show the learner how to

About the Book

Unit 1 Business Environment Lecture Note Nine

International trade and UK

Unit 1 Business Environment Lecture Note NineStart your argument by revealing that Trade is the exchange of products between countries. When conditions are right, trade brings benefits to all countries involved and can be a powerful driver for sustained GDP growth and rising living standards

One way of expressing the gains from trade in goods and services is to distinguish between static gains (i.e. improvements in allocative and productive efficiency) and dynamic gains (i.e. gains in welfare that occur from improved product quality, increased choice and faster innovative behaviour).

Gains from Trade – Understanding Comparative Advantage

First introduced by David Ricardo in 1817, comparative advantage exists when a country has a ‘margin of superiority’ in the supply of a good or service i.e. where the marginal cost of production is lower

Countries will generally specialise in and export products which use intensively the factors inputs which they are most abundantly endowed

If each country specializes, total output can be increased leading to better allocative efficiency and welfare.

Because production costs are lower, providing that a good price can be found from buyers, specialisation should focus on goods and services that provide the best value

In many countries, comparative advantage is shifting towards specialising in producing and exporting high-value and high-technology manufactured goods and high-knowledge services

Example of Comparative Advantage

Usually we take a standard two-country + two-product example to illustrate comparative advantage.

  • Consider two countries producing digital cameras and vacuum cleaners
  • With the same factor resources (inputs) evenly allocated by each country to the production of both goods, the production possibilitiesare as shown in the table below:
OUTPUT BEFORE SPECIALISATIONDigital CamerasVacuum Cleaners
UK600600
United States24001000
Total30001600

Stage 1: Working out the comparative advantage

  • To identify who should specialise in a particular product, consider the internal opportunity costs
  • Were the UK to shift their resources into supplying more vacuum cleaners, the opportunity cost of each vacuum cleaner is one digital television
  • For the United States the same decision has an opportunity cost of 2.4 digital cameras. Therefore, the UK has a comparative advantage in vacuum cleaners
  • If the UK chose to reallocate resourcesto digital cameras the opportunity cost of an extra camera is one vacuum cleaner. But for the USA the opportunity cost is only 5/12ths of a vacuum cleaner.
  • USA has comparative advantage in producing digital cameras because its opportunity cost is lowest

Stage 2: Showing the Output after Specialisation

output after specialisationDigital CamerasVacuum Cleaners
UK0 (-600)1200 (+600)
United States3360 (+960)600 (-400)
Total33601800
  • The UK specializes totally in producing vacuum cleaners – doubling its output – now1200
  • The United States partly specializes in digital cameras increasing output by 960 having given up 400 units of vacuum cleaners
  • As a result of specialisation output of both products has increased – a gain in economic welfare.

Key point:

For mutually beneficial trade to take place, the two nations have to agree an acceptable rate of exchange of one product for another. If the two countries trade at a rate of exchange of two digital cameras for one vacuum cleaner, the post-trade position will be as follows:

  • The UK exports 420 vacuum cleaners to the USA and receives 840 digital cameras
  • The USA exports 840 digital cameras and imports 420 vacuum cleaners

Stage 3: Showing the Gains from Trade – Post Trade Output / Consumption

Digital CamerasVacuum Cleaners
UK840780
United States25201020
Total33601800

Compared with the pre-specialisation output levels, consumers now have an increased supply of both goods. 

Trade protectionism

Trade protection is the deliberate attempt to limit imports or promote exports by putting up barriers to trade. Despite the arguments in favour of free trade and increasing trade openness, protectionism is still widely practiced.

The motives for protection

The main arguments for protection are:

Protect sunrise industries

Barriers to trade can be used to protect sunrise industries, also known as infant industries, such as those involving new technologies. This gives new firms the chance to develop, grow, and become globally competitive.

Protection of domestic industries may allow they to develop a comparative advantage. For example, domestic firms may expand when protected from competition and benefit from economies of scale. As firms grow they may invest in real and human capital and develop new capabilities and skills. Once these skills and capabilities are developed there is less need for trade protection, and barriers may be eventually removed.

Protect sunset industries

At the other end of scale are sunset industries, also known as declining industries, which might need some support to enable them to decline slowly, and avoid some of the negative effects of such decline. For the UK, each generation throws up its own declining industries, such as ship building in the 1950s, car production in the 1970s, and steel production in the 1990s.

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