This economic principle is known as Absolute Advantage.
Absolute advantage has benefits to each nation:
- Exporting goods for its own sake is pointless, therefore:
- Exporting of products to another nation allows the first country to import a product it cannot produce for a variety of reasons
- It may seem desirable for a country too be self sufficient, but this would possibly reduce: specialisation, division of labour and wealth of nations
There are criticisms of Adam Smiths principles:
- Its all too simple and applies only when both countries have an absolute advantage in one commodity
- What happens if one country is able to produce both commodities absolutely cheaper than another
Comparative Advantage
As long as one country can export goods where its relative cost of production is lower than another country, that nation is said to have a Comparative Advantage over other nations.
There will be a mutual advantage to trading with other countries only if there are differences in the relative cost ratios between countries.
Comparative advantage has benefits to each nation:
- Specialisation
- Increased consumption in commodities
- More goods freely available to each nation than had countries not traded with each other
Economics of Scale
Economics of scale occur when mass producing a good result in lower average costs. Economics of scale occur within a firm (internal) or within an industry (external).
Internal Economics of Scale
These are economics made within a firm as a result of mass production. As the firm produces more goods the average costs begin to fall because:
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Technical economics made in the actual production of the good E.g. large firms can use very expensive machinery, intensively
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Managerial economics made in the administration of a large firm by splitting up management jobs and employing specialist accountants, salesman etc
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Financial economics made by borrowing money at lower rates of interest than smaller firms
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Marketing economics made by spreading the high cost of advertising on television and in national newspapers, across a large level of output
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Commercial economics made when buying suppliers in bulk and therefore gaining a larger discount
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Research and development economics made when developing new and better products
External Economics of Scale
These are economics made outside the firm as a result of its location and occur when:
- A local skilled labour is available
- An area has a good transport network
- An area has an excellent reputation for producing a particular good
Internal diseconomies of Scale
These occur when the firm has become too large and inefficient. As the firm increases production, eventually average costs begin to rise because:
- The disadvantages of the division of labour take effect
- Management becomes out of touch with the shop floor and some machinery becomes over-manned
- Decisions are not taken quickly and there is too much form filling
- Lack of communications in large firms means that management tasks sometimes get done twice
- Poor labour relations may develop in large companies
External Diseconomies of Scale
These occur when too many firms are located in one area. Unit costs begin to rise because:
- Local labour becomes scarce and firms now have to offer higher wages to attract new workers
- Land and factories become scarce and rents begin to rise
- Local roads become congested and so transports cost begin to rise
2. Main Treaties
The treaty of Rome 1957
The treaty of Rome was signed on the 25th of March by six European countries:
1. Germany
2. Belgium
3. France
4. Italy
5. Luxembourg
6. The Netherlands
They signed two agreements on the 25th March:
- The Community Economic European (CEE)
- The European Atomic Energy Community (EURATOM)
The main agreements of the treaty are:
- Creation of a single integrated market
- Free movement of goods, labour , services, and capital between its members
- Establishment of common external tariffs on all imported goods
- Harmonisation of business laws in membership countries ( i.e. taxes) and common policies for agriculture, transport and business competition
- The creation of European social fund
- Promotion of trade with developing countries.
This treaty gives:
- The community the right to make laws that apply to all the member nations.
- The individual the right to take any other individual, firm or government to court if they break the law.
- The monitoring and competition to make it fairer.
- The creation of a European investment bank to support new development in the union.
The tasks entrusted by the community shall be carried out by certain instruction
- European parliament
- A council
- A commission
- A court of justice
- A court of auditors
This treaty created many different opportunities for the EU:
- This treaty would make things generally cheaper when trading between the European countries because there are no trade laws or taxes.
- The costs of making products would be lower because they could import products from other countries freely therefore lowering the prices they pay as there are no importation taxes.
- The quality of products will become better due to all the countries having the same laws and restrictions and all the countries involved would have grown due to them being able to trade freely around Europe allowing their business and economy growing due the bigger market.
The Single European act
The single European act was started in January 1986; the European council met up in Luxembourg and decided to give new impetus to the European integration. It was finally signed and came into power on the 1st of July 1987.
The main aims of the treaty are:
- To have free movement of labour, with the workers from member nations with the ability to obtain employment and live in any community state. To receive unemployment benefit in their chosen country of residence and to have equal access to public housing and education for their children in they’re adopted nation. Individuals could then retire and continue to live in that country.
- To have free movement of capital so then firms and individuals could obtain finance or deposit funds within anywhere of their community. All intra- community exchange controls have now been abolished.
- To have freedom of establishment for businesses, enabling any EC resident to commence operations (or purchase an existing firm) in any community state and to compete on equal terms with local enterprises.
- To have open access to public sector contracts (i.e. supply contracts for national and local government agencies and publicly owned organisations) for all EC firms. The single European market was to be completed by January 1993. Accordingly, hundreds of measures were initiated in order to dismantle trade barriers between EC nations, remove obstacles to free competition, harmonise technical standards and business procedures and generally promote European economic integration. Also a number of social initiatives (such as aid for regional development for the retaining of unemployment workers) accompanied by the programme with a view to improving living standards and stimulating growth. Qualified majority voting was introduced for matters relating to the harmonisation of technical standards and business practices, the free movement of goods, services and capital freedom of establishment for firms and the common recognition of the qualifications of workers.
- The removal of barriers to trade across national boundaries, allowing firms to transport goods on a single administrative document.
- The movement towards European standards for products in terms of quality, labelling, safety etc and adoption of a community trademark system.
- Allowing firms from other member countries to compete for government contracts.
- Closer levels of VAT and excise duties across the EU.
- Closer co-operation on legal matters, immigration policy and police matters.
This treaty created many different opportunities for the EU:
- Free movement of goods – this by far is the greatest success of the single market programme. The removal of barriers to the free movement of goods. They benefit from larger markets and can cut production costs.
- Free movement of capital – There are no obstacles to the free flow of capital within the EU. This now means that it is much easier for people to invest into foreign companies.
The Single European Act transformed the EC from being little more than a customs union into a genuine single market with complete freedom for community businesses to set up anywhere in the EC and to engage in cross border intra community trade as if they were doing business within a single country.
The Maastricht Treaty
The maastricht treaty was set up in the Netherlands in December 19991 to give the EU an opportunity to come “a political and economic world superpower” the treaty would also give the EU single European currency, common citizenship and foreign and security policy. All of the twelve EU countries have approved the treaty as well as its monetary policy. At the treaty it was decided that there would be five economic conditions that would need to be fore filled. All these conditions need to be meet by each of the individual nations in the EU. All these nations will need to maintain a similar economic state.
The aims of the treaty were to establish a single EU currency and provide the EU with more power to deal with such matters as the environment, education, public health and communication amongst members. Establish a common foreign and defence policy and create a greater co-operation among the twelve police and justice systems.
There are four main aims of the maastricht treaty:
1. The first of the four economic criterions concerns price stability in the national state.
2. A second criterion that was considered to be important is the long-term interest rates of the nations.
3. The third condition that has to be met regards the stability of currency.
4. The fourth economic condition that the nation states have to satisfy deals with the national average budget deficit.
This treaty gave the community more power and introduced the concept on union citizenship. It also changed the name of the union from the European Community to the European Union. This treaty also developed the common foreign and defence polices.
The advantages this policy has are:
- The costs would go down as it would be free trade and the nations would be of “similar economic state” and it would do the same for price as well. Prices and costs would be able to be under control as the market will be steady.
- The nations would be trading freely and able to grow in the market and sustain production and sales of the product easily due to the fact the EU is fairly balanced and in such a stable market place.
