14.2 Trade

Question 1

What is absolute advantage?

Answer 1

A country has an absolute advantage of it can produce more of a good than other countries from the same amount of resources

Question 2

What helps to show the principle of comparative advantage benefiting international specification and free trade?

Answer 2

Look at the related concept: absolute advantage

Question 3

Table to show absolute advantage:

Each country has two units of a resource

Answer 3

Atlantis has an absolute advantage in producing guns but Pacifia has an absolute advantage for butter production

Question 4

Production without specialisation?

Answer 4

Splitting resources 50/50 between two goods

Question 5

Diagram for production with specialisation

Answer 5

Question 6

Output gain from complete specialisation?

Answer 6

Question 7

Output gains translate to gains in trade depending on two factors, what are they?

Answer 7

Administration and transport costs occur whenever trade takes place (as a result the net gains from trade are?

Net gains of trade
(3 guns+4 tonnes of butter) -transport and administration costs

Question 8

When are specialisation and trade not worthwhile?

Answer 8

If transports and administration costs exceed the output gains resulting from specialisation

Question 9

What is needed for trade to occur?

Answer 9

Demand on both sides for the respective good

(Assume each country exports surplus to country’s when it has satisfied its inhabitance demand for goods in which it specialises)

Question 10

What is a comparative advantage?

Answer 10

It is measured in terms of opportunity cost. The country with the least opportunity cost when producing a good possesses a comparative advantage in that good

Question 11

Diagram for an absolute advantage in two goods

Answer 11

Although Atlantis has an absolute advantage in producing guns and butter he has a comparative disadvantage in the production of butter

This is because a comparative advantage is measured in in the terms of opportunity cost, (what a country gives up by reducing income by one unit)

Question 12

When a country possesses an absolute advantage in two goods where does the comparative advantage lies?

Answer 12

In producing the good where the absolute advantage is greater

Question 13

When does a country with an absolute disadvantage in tow products hold a comparative advantage?

Answer 13

In the product where the absolute advantage is less

Question 14

Diagram for a comparative advantage for gun production while another country has a comparative advantage in butter production

Answer 14

Question 15

When a country has an absolute advantage in both goods does complete specialisation in accordance with the principle of comparative advantage result in a net output gain and why?

Answer 15

No because the output of one good rises whilst the output of the other decreases

Question 16

What can produce a net output gain?

Answer 16

Partial specialisation

Question 17

Who came up with absolute advantage?

Answer 17

Adam smith

Question 18

Who came up with the comparative advantage?

Answer 18

David Ricardo

Question 19

Ricardo believed that a country can reach its full potential (living standards, maximising output, welfare) ect?

Answer 19

If the market economy is truly international(county should specialise in activities where it possesses a comparative advantage

Question 20

What are the 3 underlying assumptions of the comparative advantage?

Answer 20

-each country’s factors of production is fixed and immobile between countries (in the case of international trade, finished goods rather than factors of production or inputs are assumed ro be mobile between countries

-demand and cost conditions are relatively stable. Over specialisation can lead to a country being vulnerable to sudden changes in demand or changes in cost and availability in cost of raw materials (changes in cost eliminate a country’s comparative advantage)

-there are constant returns of scale(increasing returns of scale-the more a country specialises in a activity it has an absolute advantage the more it’s productive efficiency increases)(if there are decreasing returns of scale specialisation erodes efficiency and destorys a country’s initial advantage)

Question 21

When does a country enjoy a competitive advantage?

Answer 21

When it produces better-quality goods at lower costs and better prices than its rivals

(More similar to absolute advantage than comparative advantage

Question 22

What creates a competitive advantage?

Answer 22

Dynamic factors that promote the growth of firms.

Successful investment undertaken over many years equips a country work a modern production capacity capable of producing high quality goods people want to buy

Question 23

What can import controls be divided into?

Answer 23

Quantity controls such has quotas which puts a maximum limit on tariffs or import duties(and their opposite export subsidies)

Which raise the price of imports or produce the price of exports

Question 24

Quotas?

Answer 24

Physical limits on quantities of imported goods allowed into a country

Question 25

Tarifs

Answer 25

(Also known as import duties) taxes imposed on imports from other countries entering a country

Question 26

Export subsidies?

Answer 26

Money given to domestic firms by the gov to encourage firms to sell products abroad and gel make their goods cheaper in export markets

Question 27

What do supporters of free trade believe about import controls?

Answer 27

Prevent countries from specialising in activities in which they have a comparative advantage and from their trading surpluses Due to this production takes place inefficiently and production is reduced Case for free trade depends of the assumptions of comparative advantage

Question 28

What are the ways import controls have been justified?(8)

Answer 28

-infant industries -sunset industries -strategic trade theory -agricultural efficiency -changes in demand or cost conditions -anti-dumping -self sufficiency Employment

Question 29

What are the ways import controls have been justified? Infant industries:

Answer 29

Benefits from increasing returns to scale, more a country specialises in an industry the more productively efficient it becomes +increases comparative advantage Developing countries protect infant industries from established rivals in advanced economies

Question 30

What are the ways import controls have been justified? Sunset industries

Answer 30

Protect older industries in developed economies form emerging competition in developing economies

Question 31

What are the ways import controls have been justified? Strategic trade theory

Answer 31

Comparative and competitive advantage are often not natural Govs try to create a competitive advantage by nurturing strategically selected industries in economic sectors Justifies protecting industries where comparative advantage is being built up

Question 32

What does strategic trade theory argue about protectionism?

Answer 32

Prevent exploration by an overseas-based monopoly

Question 33

Governments in more economy lay developed countries use two types of strategic trade policy used to help declining industries?

Answer 33

-subsidies on exports out taxes on imports -help trade adjustments assistance to other aid workers and firms in these industries

Question 34

What are the ways import controls have been justified? Changes in demand or cost conditions

Answer 34

Over-specialisation May cause a country to become partially vulnerable to sudden changes in demand or cost and availability of raw materials or energy Specialisation can lead to a lack of diversity in a country’s economy-countries could benefit from diversifying their economy(income controls)

Question 35

What are the ways import controls have been justified? Anti-dumping?

Answer 35

When a country produces too much of a good for its own domestic market-surplus may be dumped in overseas market Often justified to prevent unfair competition

Question 36

What are the ways import controls have been justified? Self sufficiency

Answer 36

Protection needed for military and strategic reasons to ensure a country is relatively self sufficient

Question 37

What are the ways import controls have been justified? Employment

Answer 37

Trade unions argue import controls needed to prevent multinational firms shifting capital to low wage economically developing countries and exporting their output back to the countries and exporting their output back to the countries from which the capital was moved

Question 38

What is a closed economy

Answer 38

One with no international trade

Question 39

What happens to a closed economy

Answer 39

Domestic demand for a good in a country can only be met by domestic supply

Question 40

Diagram for consumer and producer surplus of a closed economy

Answer 40

Question 41

What would happen to domestic imports in free trade?

Answer 41

Have to compete with cheaper imports

Question 42

Diagram for welfare gains and losses after the introduction of a tariff

Answer 42

Question 43

Describe this diagram

Answer 43

Imports priced at Pw (lower than p1)m equilibrium at point V Although domestic demand has increased to QD1 domestic supply falls to QS1 Imports (QD1-QS1) Gil other gap between domestic demand and supply

Question 44

How does imports affect economic welfare?

Answer 44

(Must first understand consumer and producer surplus affected when change of price falls to pw Consumer surplus increases by yellow and green (B+C) B shows a transfer away to domestic firms to domestic consumers The fall in price is brought about by lower import prices means that part of the producer surplus becomes consumer surplus Consumers also gain Cm net welfare gain =C

Question 45

The effect of imposing a tariff (diagram)

Answer 45

If the tariff equals distance between p1 and pw the domestic market for goods reverts for the original equilibrium position that existed before the imports entered the country But if there is a smaller tariff producers charge pw+t and domestic demand falls to Qs2 At higher price consumer surplus falls -D and B are the areas of transfer of wealth away from consumers to domestic producers Net lose measured by triangles A and C.

Question 46

What is the difference with the north-north trade and north-south trade

Answer 46

North-south trade developed and developing economies North-north trade between developed Economies

Question 47

Diagram for trade with EU and non EU countries 2017

Answer 47

Question 48

Diagram for UK imports and exports 2018

Answer 48

Question 49

What are the 6 types or economic integration

Answer 49

Preference area Free trade area Customs unions Common markets Economic unions Politcal unions

Question 50

What is a preference area?

Answer 50

Countries agree to a levy reduced, or preferential tariffs on certain trade

Question 51

What is a free trade area?

Answer 51

In a free trade area, member countries abolish tariffs on mutual trade, but each partner determines its own tariff on trade with non-member counties

Question 52

What are customs unions

Answer 52

Trading blocs in which member countries enjoy internal free trade in goods and possible services, with all the member countries protected by a common external tariff barrier

Question 53

Common markets?

Answer 53

These are customs union with additional provision to encourage trade and integration through the free mobility of factors of production and the harmonisation of trading standards and practises

Question 54

What is economic unions?

Answer 54

Add further harmonisation in areas of general economic, legal and social policies and the development of union-wide policies. Economic union may be supplemented by monetary union, which entailed a common currency and monetary policy

Question 55

What are politcal unions?

Answer 55

Ultmaite form of economic integration (When countries Join) alt high some govs (USA) have more power than UK due to local govs in raising taxation

Question 56

Why is a free trade are and customs union similar.

Answer 56

Both have an internal free trade area (differences lie in way tariffs are set against imports of non member states)

Question 57

What is a eurozone

Answer 57

Name for EU countries that replaced their currency with the euro

Question 58

What are some key EU policies(2)

Answer 58

Common agricultural policy Common fisheries policy

Question 59

World trade organisation (WTO) objective

Answer 59

to help its members use trade as a means to raise living standards, create jobs and improves people's lives. (Have been successful in reducing import controls on manufactured goods