the reasons for international trade chapter 25

Question 1

factor endowment

Answer 1

the availability of capital, enterprise, labour and land in all economy

Question 2

absolute advantage (used in the context of international trade)

Answer 2

a situation where, for a given set of resources, one country can produce more of a particular product than another country

Question 3

why does international trade take place

Answer 3

International trade takes place because countries have different factor (resource) endowments. It is usually easier to move goods and services between countries than factors of production, and so international trade occurs.

Question 4

what affects the types of products countries produce

Answer 4

The differences in factor endowment affect the types of products countries produce and the quality and quantity of the products, as well as their cost of production.

Question 5

how can a country have absolute advantage in producing a product

Answer 5

A country has an absolute advantage in producing a product if it can produce more of the product with the same quantity of resources than another country.

Question 6

what happens if a country specializes in the product in which it has an absolute advantage then trades based on opportunity cost ratios

Answer 6

total output will rise and both countries will be able to consume more products

Question 7

opportunity cost ratio

Answer 7

the quantity of one product compared to the quantity of another product that has to be sacrificed to produce it. For example, an opportunity cost ratio of one car: eight tables means that the production of eight tables has to be given up to produce one car.

Question 8

comparative advantage (used in the context of international trade)

Answer 8

a situation where a country can produce at a lower opportunity cost than another country. trade is more based on comparative advantage

Question 9

why do some countries buy products from abroad when the country’s own producers can produce it with fewer resources

Answer 9

This allows the purchasing country’s producers to concentrate on producing those products they are even better at producing.

Question 10

how can comparative advantage be illustrated

Answer 10

it can be illustrated as the no of goods produced or in terms of the factors of production needed to produce a given number of units of a product

Question 11

free trade

Answer 11

international trade not restricted by taxes on imports and other policy tools designed to give domestic producers protection from competition from imports.

Question 12

what happens when free trade exists

Answer 12

When free trade exists, firms are free to export and import what they want in the quantities they want. No taxes or limits are imposed on exports and imports, no subsidies are given to create cost advantages and there is no unnecessary paperwork (‘red tape’) involved.

Question 13

what does free trade allow

Answer 13

Free trade allows an efficient allocation of resources with countries being able to specialize on producing those products that they have a comparative advantage in. free trade can also allow countries to use factor endowments of different countries.

Question 14

what happens when when countries specialize in products where production is most efficient

Answer 14

Allowing countries to specialize in those products where their production is most efficient should increase world output and employment and so should raise living standards.

Question 15

effect of free trade

Answer 15

The competition that may arise from free trade can put pressure on firms to keep their prices and costs down and raise the quality of their products. As a result, consumers may enjoy lower prices and better products than would have been the case in the absence of free trade. Firms may also be able to buy raw materials and capital goods at lower prices.

Question 16

impact of international market on free trade

Answer 16

firms might produce a higher output. the higher output could enable firms to take greater advantage of economies of scale. consumers may also be able to buy a greater variety of products as they may have a wider choice of products. firms may also have a wider source of raw materials and capital goods

Question 17

trading possibility curve

Answer 17

a diagram showing the effects of a country specializing and trading

Question 18

imports

Answer 18

goods and services purchased from other countries

Question 19

exports

Answer 19

goods and services sold to other countries

Question 20

terms of trade

Answer 20

a numerical measure of the relationship between export and import prices

Question 21

what influences the benefits it can gain from engaging in international trade

Answer 21

influenced by how many imports the country is able to purchase with the revenue it gains from the exports it sells. this, in turn, is influenced by the prices it receives for the exports it sells and the prices it pays for the imports it buys

Question 22

formula of terms of trade index

Answer 22

index of exports prices/index of import prices * 100

Question 23

what does it mean by the terms of trade increasing

Answer 23

this is described as a favorable movement or an improvement in the terms of trade. it means of fewer exports have to be sold to buy any given quantity of imports

Question 24

what does it mean by the terms of trade decreasing

Answer 24

this is described as an unfavorable movement or deterioration in terms of trade means that the index number has fallen. now more exports will have to be exchanged to gain the same quantity of imports

Question 25

when does a favorable movement occur

Answer 25

A favorable movement in the terms of trade occurs when there is a rise in export prices relative to import prices.

Question 26

when does an unfavorable movement occur

Answer 26

An unfavorable movement occurs when there is a fall in export prices relative to import prices.

Question 27

what are the causes of changes in terms of trade

Answer 27

changes in the demand for and supply of exports and imports, the price level and the exchange rate.

Question 28

how does demand for exports affect trade

Answer 28

An increase in the demand for exports would increase their price and so cause a favorable movement in the terms of trade.

Question 29

how does inflation rate affect prices

Answer 29

A rise in a country’s relative inflation rate would also make its export prices higher relative to its import prices.

Question 30

what is determined deterioration of trade

Answer 30

A government reducing the exchange rate is sometimes referred to as a deliberate deterioration of its terms of trade. This is because it is a deliberate attempt to reduce export prices and raise import prices in order to make the country’s products more internationally competitive.

Question 31

what does the Prebisch-Singer hypothesis suggest

Answer 31

The Prebisch-Singer hypothesis suggests that the terms of trade tend to move against countries that produce primary products.

Question 32

what is the Prebisch-Singer based upon on

Answer 32

This is based on the view that demand for manufactured goods and for services rises by more than demand for primary products when income increases.

Question 33

why can the impact of a favorable movement may not always be beneficial

Answer 33

This is based on the view that demand for manufactured goods and for services rises by more than demand for primary products when income increases.

Question 34

why may an unfavorable movement in terms of trade may actually reduce a deficit on the current account of the balance of payments

Answer 34

If demand for exports and imports is elastic, the fall in export prices relative to import prices should increase export revenue relative to import expenditure.

Question 35

why does absolute and comparative advantage not provide a full explanation of the pattern of international trade

Answer 35

Some governments may want to avoid overspecialization.
High transport costs may offset the comparative advantage.
The exchange rate may not lie between the opportunity cost ratios.
Other governments may impose trade restrictions.

Question 36

problems with theory of comparative advantage

Answer 36

it assumes that resources are mobile and that there are constant returns. also countries do not always adapt to changes in comparative advantage. it may be difficult to determine where a country’s comparative advantage lies because of the vast number of product and many countries