Comparative advantage and the EU

Bigger and bigger through trade - 4.3.2 Edexcel A2 Macroeconomics 

 After economies of scale comes globalisation. The EU fosters this: the 27 member states have abolished artificial obstacles to trading. Instead, anything made in the UK or in Spain can simply be shipped to Belgium or Sweden, anywhere else in Europe. Having such a large market - 400 million potential customers - enables firms to develop the economies of scale that eventually undercut the competition. Another aspect helps them. Imagine you are firm making frozen pizzas. One of the world's largest is in a suburb of Berlin. The wheat comes from Germany. The cheese from Holland. The tomatoes from Spain, the salami from Denmark and the gas for firing the ovens from Norway. These resources also exist in Germany, but not to the same extent. They can be produced much more efficiently in other European countries. Why not make the pizza in Spain? Because being in central Europe presents a marketing and distribution advantage; the factory is close to many customers because it is at the geographical centre of the EU. Here is the advert for the UK: C There are two types of trading advantages a country and the producers within it, can enjoy. Absolute advantage means being able to produce more of something compared to another country. Brazil can produce wood, Britain electricity from wave energy, Russia gas. This is pretty straightforward. Comparative advantage can be established by looking at the value of two alternative goods or services a country can produce. For example, it could make DVDs and wheat. If a country is more efficient at making DVDs it should concentrate on that, because it would forego a smaller income if it made wheat. The opportunity cost of DVDs would be small, that of wheat large. The country can sell the surplus DVDs to countries where wheat is produced. As as result, both countries produce more than if they didn't specialise and trade. This raises world output because every country makes goods very efficiently, with the fewest resources. All the world efforts at increasing international trade are based on this theory. Here's the video: Just following the theory is never good enough though. Here is the evaluation: - Interdependence. Countries now need each other to get the raw materials they need. This can be a disadvantage if the producer country doesn't want to sell it! Examples include rare earths - these are needed by car manufacturers, the main producer is China but given that China wants to build up its own car manufacturing industry, it's not selling them. Another example is rice. A few years ago, India stopped exporting rice to Pakistan because there was a shortage due to the climate. - Changing parameters. The resources needed to produce something can change, for example because of a technical breakthrough. Specialisation may need to change frequently, and the infrastructure of a country needs to keep up, which needs investments at extra cost. - Transport costs. These are largely ignored in our simplified model. The cost of transport is heavily dependent on the oil price. Fluctuations in the oil price add significant uncertainty to a country's comparative advantage, especially if it trades with countries far away. - Environmental impact. Specialisation can lead to monoculture or the destruction of rainforest, for example in Borneo where large areas of rainforest have been cut down so that palm trees can be planted; these produce palm oil. This is used for shampoo, soap, margarine, cooking oil, pizza ... in Europe. Of course, the transport of the goods also causes negative externalities. - changes in the market price of the good. If a country produces a good that is no longer in demand, it may not be able to build up alternative industries quickly to replace it. It may have over-specialised. - impact of exchange rates. If the goods a country buys are sold to countries with a falling exchange rate, these countries may not be able to afford the good and buy fewer. This causes unemployment in the economy of the exporting country, unless it can find other trading partners. What about the UK? The UK's exports have rising since 2010: 2009 - £228bn, -9.5% 2010 - £266bn, +16.5% 2011 - £299bn, +12.6% The UK's imports have also risen: 2009 - £311bn, -10.2% 2010 - £364bn, +17.4% 2011 - £398bn, +9.4% Source: ONS Click on the link below to the Guardian's interactive feature on what the UK exports, and to which countries. http://www.guardian.co.uk/news/datablog/2010/feb/24/uk-trade-exports-imports Now do the following: Add together the total of all exports going to EU countries in 2011. Calculate this as a percentage of total exports the UK sends abroad. Comment on your findings. How large is it? What effect does continuing recession in the EU have on Brtish exports there? What would be the effect of leaving the EU? Take one example of the goods that are imported by the UK and one example of exports. Explain why exporting is an advantage to the firms in the UK, and why consumers and firm benefit from imports, using your own knowledge and the theory of comparative advantage. Then evaluate the potential downside.

A2 Microeconomics - Economies of scale

Growing in size means adding to factors of production - in economics an addition to factors takes place in the long run (or the long term). All sorts of cost advantages ensue, not least because a large firm can afford to hire/buy the most expensive, most efficient equipment which is then put to good use on a grand scale, far undercutting the smaller competitors. A few examples, set to music, are below:

http://youtu.be/HmzBdXiRgho

The video link is here.

A2 Microeconomics - What is a takeover?

Here is a short video explaining the mechanics (first 4 and a half minutes) and then in a bit more detail about how one company takes over another.

The video is here.