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total-utility

Total utility

In economics, utility refers to the amount of satisfaction that a consumer gains from a particular good or service.Total utility refers to the complete amount of satisfaction gained. Marginal utility refers to the satisfaction gained from an extra unit consumed. If the marginal utility of the last item is positive – then total utility will be increasing If the marginal utility of the last consumption is negative – total utility will be fallingExample of Marginal and Total Utility for Icecream consumption  

EU tariffs

Trade Barriers

Definition Trade barriers are government policies which place restrictions on international trade. Trade barriers can either make trade more difficult and expensive (tariff barriers) or prevent trade completely (e.g. trade embargo) Examples of Trade BarriersTariff Barriers. These are taxes on certain imports. They raise the price of goods making imports less competitive. Non-Tariff Barriers. These involve rules and regulations which make trade more difficult. For example, if foreign companies have to adhere to complex manufacturing laws it can be difficult to trade. Quotas. A limit placed on the number…

Trade Creation

Trade Creation

Definition of trade creation Trade creation refers to the increase in economic welfare from joining a free trade area, such as a customs union. Trade creation will occur when there is a reduction in tariff barriers, leading to lower prices. This switch to lower cost producers will lead to an increase in consumer surplus and economic welfare. Diagram of trade creationRemoving tariffs reduces the price of imports from P1 to P2. Quantity bought rises from Q3 to Q4. Therefore there is an increase in consumer surplus, equal to area 1+2+3+4Reducing tariffs…

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Trade Deficit Definition

A trade deficit implies the value of imports is greater than exports. (M>X) A trade deficit is often split into trade in goods and trade in services. The opposite of a trade deficit is a trade surplus (X>M)During the 1980s and 1990s, the UK often had a trade deficit. This was because we imported more goods and services than exported. The balance of trade comprises the majority of a currect account balance. If a country has a trade deficit it will invariably have a current…

Trade Diversion

Trade Diversion

Definition Trade diversion occurs when tariff agreements cause imports to shift from low-cost countries to higher cost countries. Trade diversion is considered undesirable because it concentrates production in countries with a higher opportunity cost and lower comparative advantage. Trade diversion may occur when a country joins a free trade area with a common external tariff. Example of trade diversionSuppose the UK place a tariff on the import of cauliflowers to all countries equally. There is an equal tariff to European countries…

Trade Liberalisation

Trade Liberalisation

Definition Trade liberalisation involves removing barriers to trade between different countries and encouraging free trade. Trade liberalisation involves:Reducing tariffs Reducing/eliminating quotas Reducing non-tariff barriers.Non-tariff barriers are factors that make trade difficult and expensive. For example, having specific regulations on making goods can give an unfair advantage to domestic producers. Harmonising environmental and safety legislation makes it easier for international trade. Advantages of Trade LiberalisationComparative advantage. Trade liberalisation allows countries to specialise in producing the goods and services where they have a comparative advantage (produce at lowest opportunity cost)….

aid-vs-trade

Trade not Aid

Definition of ‘Trade not aid’ This is the economic idea that the best way to promote economic development is through promoting free trade and not providing direct foreign aid.Logic of ‘Trade not Aid’A culture of dependency. Foreign aid to developing economies is invariably wasteful and can create a culture of dependency. Also, recipients of aid may feel lower self-esteem, which is damaging in the long-run. Milton Friedman argues that, whilst aid can increase capital in a developing economy, it is also…

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Trade Sanctions

Trade Sanctions are laws passed to restrict or abolish trade with certain countries. Trade Sanctions can take various forms such as:Complete embargo on specific types of trade. Tariff Barriers. Higher taxes on imports of goods. If the tariffs are sufficiently high, it may stop imports completely. Quotas limiting the amount of tradeTrade Sanctions could be implemented for political or economic reasons.For example, the US imposed a trade embargo with Cuba from 1963, in protest at the Communist government. From 2000, the embargo was lifted on medical and agricultural items, but remain on…