International Trade - I have been asked to investigate the possibility of a company (David Lloyd) and see what affects it could have on a new country outside the EU.

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              International Trade

I have been asked to investigate the possibility of a company (David Lloyd) and see what affects it could have on a new country outside the EU.  

David Lloyd is a well-established company in England with over 27 gyms opened up in the England.

Its advantages are that it has a variety of different sports facilities available to the members that attend there. These facilities are used to good affect as you can go there any time of the day between its opening and closing hours.

In this coursework I will be looking at whether David Lloyd could be successful in opening up in China and whether people there would take a shine to as people have over here.

A variety of celebrities also have memberships with David Lloyd these include Trevor McDonald, Elton John, Ralph Lauren and various footballers.

International Trade

This is the exchange of goods and services between nations. “Goods” can be defined as finished products, as intermediate goods used in producing other goods, or as raw materials such as minerals, agricultural products, and other commodities. International trade commerce enables a nation to specialize in those goods it can produce most cheaply and efficiently, and sell those that are surplus to its requirements. Trade also enables a country to consume more than it would be able to produce if it depended only on its own resources. Finally, trade encourages economic development by increasing the size of the market to which products can be sold. Trade has always been the major force behind the economic relations among nations; it is a measure of national strength.

If David Lloyd wants to be successful in attaining a competitive environment with its other competitors in China the company will have to look at how opening up a gym can offer consumers benefits and problems.

The advantages of International Trade are that besides this basic advantage, further economic benefits result when countries trade with one another. International trade leads to more efficient and increased world production, as a result allowing countries (and individuals) to consume a larger and more varied bundle of goods. A nation possessing limited natural resources is able to produce and consume more than it otherwise could. As noted earlier, the establishment of international trade increases the number of potential markets in which a country can sell its goods. The increased international demand for goods translates into greater production and more general use of raw materials and labour, which in turn leads to growth in domestic employment. Competition from international trade can also force domestic firms to become more efficient through modernization and innovation. Within each economy, the importance of international trade varies. Some nations export cheaply to expand their domestic market or to aid economically dejected sectors within the home economy. Other nations depend on trade for a large part of their national income and to supply goods for domestic consumption. International trade is also viewed as an important means to promote growth within a nation’s economy; developing countries and international organizations have increasingly emphasized such trade.

Government Restrictions

Because international trade is such an integral part of a nation’s economy, governmental restrictions are sometimes introduced to protect what are regarded as national interests. Government action may occur in response to the trade policies of other countries, or it may be taken in order to protect specific industries. All nations seek to achieve and maintain a favourable balance of trade—that is, to export more than they import, or at least to keep the surplus of imports over exports to a minimum.

In a money economy, goods are not merely bartered for other goods; rather, products are bought and sold in the international market with national currencies. In an effort to improve its balance of payments (that is, to increase reserves of its own currency and reduce the amount held by foreigners), a country may attempt to limit imports by controlling the amount of currency that leaves the country.

Import Quotas

 One method of limiting imports is simply to close the ports of entry into a country. More commonly, maximum allowable import quantities may be set for specific products. Such quantity restrictions are known as quotas. These may also be used to limit the amount of foreign or domestic currency that is permitted to cross national borders. Quotas are imposed with the aim of stopping or even reversing a negative trend in a country’s balance of payments. They are also used as a means of protecting domestic industry from foreign competition. Modern economic thought tends to condemn both quotas and the aims they serve as economically damaging protectionism.


 The most common way of restricting imports today is by imposing tariffs, or taxes on imported goods. A tariff, paid by the buyer of the imported product, makes the price higher for that item in the country that imported it. The higher price reduces consumer demand and thus effectively restricts the import. The taxes collected on the imported goods also increase revenues for the nation’s government. Furthermore, tariffs serve as a subsidy to domestic producers of the items so taxed; the higher price that results when a tariff is imposed encourages the competing domestic industry to expand production.

Non-Tariff Barriers to Trade 

 In recent years the use of non-tariff barriers to trade has increased. Although these barriers are not necessarily administered by a government with the intention of regulating trade, they however have that result. Such non-tariff barriers include government health and safety regulations, business codes of conduct, and domestic tax policies, or even “austerity” campaigns aimed at cutting the consumption of (frequently imported) luxury goods. Direct government support of various domestic industries is also viewed as a non-tariff barrier to free trade, because such support gives the supported industry an additional advantage versus non-assisted industries in local or even international markets.

If a business is to be successful it will have to look at import quotas and tariffs as this can affect the companies affect on the market.

Because a quota is important to a company as it will lead to a restriction in supply in that market this will be affect to David Lloyd because they may only be allowed to open up a certain amount of outlets in China.

Tariffs will be of importance to David Lloyds in some perspective as the company will have to import a few things but the majority of its materials will be brought from China therefore reducing any imports needed in affect reducing the companies costs.

The imposition of quotas is important as when there is a situation in which there is free trade and no barriers to trade are imposed then at the world price Pw domestic producers will supply Q1 and Q1-Q2, which will be imported.


Figure 1

The following is an explanation of Figure 1

The supply curve to the domestic market will be Abd1.

The effect of imposing a quota will be to limit the amount of imported goods. Let us suppose the quota cuts imports from Q1-Q2 to Q1-Q3. A new supply curve can now be drawn incorporating the amount of the quota, BC, and the amount that domestic producers supply, AB ( at prices below Pw) and Cd2 (at prices above Pw).

The world price Sw no longer acts as the relevant supply curve. The effect of the quota will raise the market price to Pq. This will reduce the benefit to consumers causing a loss of consumer surplus.

The advantages of the quota is that its affect will be more clear-cut that that of a tariff. With a tariff the impact of the tariff on the quantity imported by a company will depend on the price of elasticity of demand for imports.

Tax will also be important to David Lloyds as their members will constantly pay a membership fee and some of the money will be taken by the government as a form of tax and as David Lloyds is a company based outside of China this will have a bigger affect on David Lloyds as more tax may be taken as the government know that it is making money outside China as well. So revenue of David Lloyd will be coming in from China and the UK and this will not have a positive affect and the tax deducted will be taken from David Lloyds overall profits and figures. This can cause problems for the company as they will have to manage their wages and expenses better and more efficiently in order to continue operating and not be taken into administration.

Absolute Advantage

In order to understand more fully how international trade takes place and increases the welfare of its citizens we need to consider why trade takes place. To do this the principles of comparative and absolute advantage takes place. A country has absolute advantage over its competitors its competitors if it’s able to produce more. As a company is able to do this the company will remain competitive in the market. This may be because of the fact that they may have more of a good service and provide more even with the same amount of resources which they have available to them.

This will be of some importance to David Lloyds as the management will have to consider how they can not only meet the resources required to their competitor gym in China but also how to beat it in terms of service as just matching them is not enough they have to offer that something special as consumers will be looking for that when David Lloyds tries to sell itself in China.

Principle of Comparative Advantage

David Ricardo when he talked about his theory said that countries should specialize and trade goods and services in which they have a comparative advantage.

It is easy to see that if countries have and absolute advantage there are rewards to trade for that particular company.

But if a company has absolute advantage over its trading partner in the production or amount of services offered to its consumers.

Specialization and trade can still result in there being welfare gains made from trade.

A country has Compartitive advantage in the production of a good or service that it produces at a lower opportunity cost that its traders.

Some countries even have an absolute disadvantage. This is when the country is not good at producing services and goods when compared to its trading partners.

The theory just argues that it is better for a country that is inefficient at producing a good or service to specialize that in the production of that good that it is least good at producing (best at producing).

The production possibility curve can be used to show the principles of this theory.

Figure 2

As you can see in Fig 2 Country A has an absolute advantage in the production of both maize and wheat. At all points its production possibility curve lies on the right of that of country B.

Country B has an absolute disadvantage. Due to the abundance of raw materials or more productively efficient production techniques, Country A is able to produce more wheat and more maize when compared with country B. Perhaps common sense tells us that Country A should produce both goods and export surpluses and Country B neither. However, when comparative advantage is considered a different picture emerges.

Consider the opportunity cost of Country A producing one more unit of maize. Half a unit of wheat has been expected. When country B produces one more unit of maize two units of wheat are predetermined. Economics is concerned with the allocation of scarce resources. Fewer resources are taken if Country A concentrates its resources in the production of maize. Now consider the opportunity cost of Country B producing one more unit of wheat. Two units of maize have been taken. When Country B produces one more unit of wheat only half a unit of maize is taken. Fewer resources are used if Country B specialises in the production of wheat.

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In the above case Country A should produce maize and Country B wheat. The surpluses produce should then be traded.

This is important to David Lloyd, as they will have to think whether or not they have a Compartitive advantage over the other gyms and this can play a vital role in their possible success and downfall of the company. David Lloyd’s will also have to produce well planned out marketing strategies in order to promote and sell their gym well to customers within China.

Manufacturing Activities of United States, China and ...

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