OCR F585 June 2015 The Global Economy

Reasons why the UK has lost its comparative advantage ??

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Reply 1782

edwah011

Original post by *Stefan*

I did look around a bit but every major site agreed that trade creation = increased surplus and vice versa. I'll check it out again later on.

That is still trade creation. Trade creation is when the final price of a new trading partner is lower than the final price of the previous trading partner (ie the overall price falls). In my own example, the final price increased (since both goods became more expensive than pre-integration), leading to trade diversion.

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Look at the OCR textbook definition.
"Where economic integration results in trade switching from a low cost supplier outside the economically integrated area to a less efficient source within the area"

The African potatoes are produced at a lower cost, and purchased cheaper than German potatoes, then trade switches to German potatoes which are produced less efficiently.

Reply 1783

Original post by edwah011

Long winded, elaborate and confusing examples aside, the point to take from all this is that decreasing consumer surplus is not necessarily a guarantee in the case of trade diversion, although it is more likely than an increase in consumer surplus. Trade diversion and creation are only based on relative efficiencies and don't take account necessarily of tariffs and other NTBs that could change the outcome on consumer surplus

I'd say it's always the same.

If the UK is able to buy a good more cheaply within an integrated area, then trade creation takes places and consumer surplus inevitably increases.

If, on the other hand, the good becomes more expensive than before due to tariffs, and the final price increases, then trade diversion takes place and consumer surplus is lost.

I've searched quite a few reputed sites by now and all actually support this.

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Reply 1784

Original post by edwah011

Look at the OCR textbook definition.
"Where economic integration results in trade switching from a low cost supplier outside the economically integrated area to a less efficient source within the area"

The African potatoes are produced at a lower cost, and purchased cheaper than German potatoes, then trade switches to German potatoes which are produced less efficiently.

But German potatoes are now more cost effective. It doesn't matter whether Africa was cheaper before. The elimination of the tariffs from German potatoes makes them cheaper than those of Africa, resulting in trade creation.

All you need to remember is that if the final price is cheaper than before, trade creation occurs. If the final price is higher than before, trade diversion occurs.

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Reply 1785

Hammy_23

Comment on the extent to which the UKlosing comparative advantage in production of ‘manufactures’, office andtelecom equipment’ and ‘machinery’ is disadvantageous to the continued successof the UK economy (10)

could anyone give a few solid evaluative points??

Reply 1786

AsianBeauty

Why has the UK lost its comparative advantage ?

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Reply 1787

lionelmessi19

Original post by edwah011

It can work either way. Assume before joining the EU the cost of African potatoes was 4 pounds per unit with a tariff of £2 per unit and German potatoes cost 6 pounds per unit with a tariff of £3 per unit.

Upon entering the EU, African potatoes reman 4 pounds per unit assuming CET is same as UKs tariff. But now free trade with Germany reduces price of their potatoes to 3 pounds per unit as they are now tariff free.

As a result of trade diversion, potatoes are now 1 pound a unit cheaper, consumer surplus has increased. So really it depends on the situation

Cheers for your help!! Appreciate it :smile:

Reply 1788

Phoebe29

6

Original post by *Stefan*

But German potatoes are now more cost effective. It doesn't matter whether Africa was cheaper before. The elimination of the tariffs from German potatoes makes them cheaper than those of Africa, resulting in trade creation.

All you need to remember is that if the final price is cheaper than before, trade creation occurs. If the final price is higher than before, trade diversion occurs.

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Trade creation and trade diversion are about whether consumers are buying from the most efficient source or not-
trade creation is when consumers switch from high cost inefficient domestic producers to low cost efficient producers within the integrated area, after joining a customs union

trade diversion is when consumers divert from purchasing goods from the most efficient world producer to a less efficient producer within the integrated area, after joining a customs union

Reply 1789

lionelmessi19

Original post by *Stefan*

I did look around a bit but every major site agreed that trade creation = increased surplus and vice versa. I'll check it out again later on.

That is still trade creation. Trade creation is when the final price of a new trading partner is lower than the final price of the previous trading partner (ie the overall price falls). In my own example, the final price increased (since both goods became more expensive than pre-integration), leading to trade diversion.

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I'll send you some links in a bit :smile:

Reply 1790

Original post by Phoebe29

Trade creation and trade diversion are about whether consumers are buying from the most efficient source or not-
trade creation is when consumers switch from high cost inefficient domestic producers to low cost efficient producers within the integrated area, after joining a customs union

trade diversion is when consumers divert from purchasing goods from the most efficient world producer to a less efficient producer within the integrated area, after joining a customs union

This is a rather confusing topic, but her example was NOT one of trade diversion. For trade diversion to occur, the price of the product has to increase. In that case, the price of the potatoes actually decreased.

African potatoes may have been cheaper pre-tariffs, but that does not change the fact that tariffs are still in place for Africa.

If ALL tariffs were eliminated, and thus African potatoes were still cheaper, the UK would have no reason to buy from Germany, so no trade diversion would take place (of course this is against the principle of economic integration)

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(edited 8 years ago)

Reply 1791

edwah011

Original post by Phoebe29

Trade creation and trade diversion are about whether consumers are buying from the most efficient source or not-
trade creation is when consumers switch from high cost inefficient domestic producers to low cost efficient producers within the integrated area, after joining a customs union

trade diversion is when consumers divert from purchasing goods from the most efficient world producer to a less efficient producer within the integrated area, after joining a customs union

This is my understanding also, the textbook definition is pretty clear about it I thought

Reply 1792

treedough

Here is a link that you guys might find useful for trade creation and trade diversion h ttp://w ww.dineshbakshi.com/ib-economics/international-economics/157-revision-notes/2137-trade-creation-and-trade-diversion

If you click on the link, make sure to add another 'w' at the start of the url or just remove the space that i put between the www

(edited 8 years ago)

Reply 1793

Original post by treedough

Here is a link that you guys might find useful for trade creation and trade diversion h ttp://w ww.dineshbakshi.com/ib-economics/international-economics/157-revision-notes/2137-trade-creation-and-trade-diversion

^ That's spot on. Check it out!

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(edited 8 years ago)

Reply 1794

bg9876

Original post by AsianBeauty

Why has the UK lost its comparative advantage ?

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I think basically goes back to factor endowments, we used to trade a lot of manufactured goods in which we had a comparative advantage, however other countries started to industrialise and had access to cheap labour and could produce goods of the same quality but cheaper, hence undercutting the UK.

Not sure about these bits, but assuming:

due to increased globalisation, emerging and developing countries are gaining access to knowledge/capital/technology that gives developed countries a comparative advantage, and hence with lower labour costs can again undercut the UK.

Could also consider exchange rates and PPP, e.g. undervalued Yuan/overvalued sterling making UK prices less competitive?

Reply 1795

Phoebe29

6

Original post by edwah011

This is my understanding also, the textbook definition is pretty clear about it I thought

Yeah, I'm going to go with the textbook because the APT toolkit also agrees with it

Reply 1796

bg9876

How does integration, e.g. EU create monopolies/oligopolies?

Is it due to removal of tariffs etc so whoever is the lowest cost producer will gain all trade?

Thanks

Reply 1797

lionelmessi19