Global trade flows Notes

What Are The Global Trade Flows of Goods, Services, and Money?

1. Trade isn't new.
2. Long before modern currencies, communities exchanged resources to meet needs.
3. As societies grew, trade systems became more complex and increasingly relied on promises of payment and records of value, which later developed into money and credit.

How Does Trade Flow?

1. A helpful way to understand trade flows is to place them in the circular flow of income, the model showing how money moves between households (consumers and workers) and firms (producers).
2. Trade adds a "foreign sector" to this model.
   1. Export revenue is an injection into the economy: foreign buyers pay domestic firms, raising domestic income.
   2. Import expenditure is a leakage: domestic households and firms spend on foreign goods and services, so income leaves the domestic economy.
3. These flows matter because they influence overall economic activity.
   1. If export revenue rises (and other factors stay similar), firms can expand production and employment.
   2. If imports rise sharply, domestic producers may face stronger competition, and income may flow outward.

Trade and aggregate demand

1. When economists add up spending across the whole economy, they talk about aggregate demand (AD), demand from households (consumption), firms (investment), government (spending), and foreign markets.
2. In many courses, this is summarised as: $$AD = C + I + G + (X - M)$$
3. where $X$ is exports and $M$ is imports.
4. The term $(X - M)$ is called net exports.
   1. It is one way trade flows connect to measures like GDP, the value of goods and services produced in an economy.

What Are The Price and Quantity Changes in Trade?

1. Trade is often explained using supply and demand.
2. If the world price of a good is lower than the domestic price, consumers will want to buy more, and domestic firms may supply less, because they cannot compete at that price.

1. At the lower world price:
   1. Quantity demanded increases to Qd, as consumers respond to the lower price.
   2. Quantity supplied domestically falls to Qs, as domestic producers reduce output at the lower price.
   3. The difference between quantity demanded and domestic supply is filled by imports.
   4. Imports = Qd−Qs, shown by the horizontal distance between the two points at price Pw.

Consumer gains from trade

1. When prices fall and variety increases, consumers can gain in two main ways:
   1. Lower prices for everyday items
   2. More choice, including products not available domestically
2. Economists describe part of this gain as an increase in consumer surplus (the difference between what consumers are willing to pay and what they actually pay).

What Are The Uneven Impacts of Trade?

1. Trade flows rarely benefit everyone equally.
2. While consumers may gain from lower prices, domestic producers competing with imports can lose sales, profits, and market share.
3. These effects can concentrate in particular towns or regions, especially where a single industry dominates local employment.
4. Over time, some workers can transition into expanding sectors (e.g. services, advanced manufacturing, renewable energy), but adjustment can be slow and painful without retraining and social support.

What Are Some Ethical and Sustainability Issues in Trade?

1. Because trade connects producers and consumers across borders, it also creates global responsibilities.
2. Two major ethical issues are:
   1. Wage differences: firms may locate production where wages are lower.
   2. Different legislative frameworks: health and safety rules, worker protections, and environmental laws vary across countries.
3. These differences can reduce prices, but they can also encourage exploitation if companies seek the weakest protections.
4. Sustainability concerns include:
   1. Transport emissions (shipping and air freight)
   2. Resource extraction to meet export demand
   3. Waste from fast consumption cycles
   4. Food miles and the environmental cost of year-round availability

Case study

Nike

• Outsources production to factories in countries such as Bangladesh and Vietnam, where labour and safety regulations are weakly enforced
• Production costs fall, allowing lower prices for consumers and higher profits for the company
• Workers face unsafe conditions, long hours, and limited bargaining power to demand improvements
• Pressure from consumers, labour unions, NGOs, and international labour standards has led to some factory audits and reforms
• However, improvements are uneven, and working conditions vary widely across suppliers

What Is The Link Between Trade Agreements and Institutions?

1. Trade agreements can:
   1. increase trade flows by making importing and exporting easier
   2. protect certain sectors through exceptions or rules
   3. influence labour and environmental standards (depending on the agreement)

What Are The Key Things To Understand About Trade Balances?

1. A common way to summarize a country's trade flows is its trade balance: $$\text{Trade balance} = \text{Exports} - \text{Imports}$$
2. A trade surplus means exports exceed imports.
3. A trade deficit means imports exceed exports.
   1. A deficit is not automatically a sign of failure.
   2. It can reflect strong consumer demand, investment in imported capital goods, or a currency that makes imports relatively cheap.
   3. However, persistent deficits can also raise concerns about domestic competitiveness or reliance on foreign borrowing.

How Can You Approach Investigating Global Trade Flows?

1. To study trade flows, you can look at what a country exports, who it trades with, and how diversified its exports are.
2. A country with a diverse export base may be less vulnerable to sudden price drops in one product, while a country dependent on one export (e.g. oil) may face greater instability.
3. Questions to guide an investigation:
   1. Where is the country located, and how does access to seas, ports, or neighbours affect trade?
   2. What are the top exports and imports?
   3. Who are the main trading partners, and why?
   4. Are exports concentrated in one sector or spread across many?
   5. How might exchange rates, global demand, or new technologies change trade flows?