2.4.3 international trade Flashcards
(39 cards)
Who came up with the concept that specialisation can increase productivity?
Adam Smith.
What are the advantages of specialisation? [5]
- Higher output
- Potentially higher quality
- Could be greater variety of goods and services produced
- More opportunities for economies of scale so size of market increases
- More competition and this gives an incentive for firms to lower their costs
What are the disadvantages of specialisation? [4]
- Work becomes repetitive, which could lower motivation of workers
- Could be more structural unemployment since skills might not be transferable, especially because workers have focused on one task for so long
- By producing a lot of one type of good, variety could decrease for consumers
- Could be higher worker turnover for firms, as employees may become dissatisfied with their jobs
What does Norway specialise in?
They are one of the world’s largest oil exporters.
What does it mean if a country has a comparative advantage?
They can produce a good at a lower opportunity cost to another.
What does it mean if a country has absolute advantage?
When a country can produce more of a good with the same factor inputs.
What are the advantages of countries specialising in goods and services to trade? [4]
- Greater world output, so there is gain in economic welfare
- Lower average costs, since the market becomes more competitive
- Increased supply of goods to choose from
- Outward shift in the PPF curve
What are the disadvantages of countries specialising in goods and services to trade? [2]
- Less developed countries might use up their non-renewable resources too quickly, so they might run out
- Countries could become over-dependent on export of one commodity such as wheat. If there are poor weather conditions, or the price falls, then the economy would suffer
What are the types of trading blocs? [4]
- Free trade areas
- Customs union
- Common market
- Monetary unions
What is a free trade area?
Where countries agree to trade goods with other members without protectionist barriers. They allow members to exploit their comparative advantages, which increases efficiency.
What are some examples of free trade areas? [2]
- United States-Mexico-Canada Agreement (USMCA)
- European Free Trade Association (EFTA)
What is a customs union?
Countries in a customs union have established a common trade policy with the rest of the world. For example, they might use a common external tariff.
They also have free trade between members.
What is an example of customs union?
The European Union.
What is a common market?
Establishes free trade in goods and services, a common external tariff and allows free movement of capital and labour across borders.
What is an example of a common market?
The EU is a common market. EU citizens can work in any country in the EU.
What are monetary unions?
Members of a monetary union share the same currency, and is more economically integrated than a customs union and free trade area.
They use the same interest rate.
What is an example of a monetary union?
The Eurozone.
When was the Euro implemented?
In 1999 to form the Eurozone.
What are the 4 convergence criteria countries have to meet in order to join the Euro?
- Budget deficits cannot exceed 3% of GDP as they have to control their government finances
- Gross National Debt has to be below 6% of GDP
- Inflation has to be below 1.5% of the 3 lowest inflation countries
- Average government bond yield has to be below 2% of the yield of the countries with the lowest interest rates, this ensures there can be exchange rate stability
What have been the costs of trading blocs? [3]
- Trade has been diverted from elsewhere
- Protectionist barriers often imposed on countries who are not members
- Some countries may lose their best workers due to increased mobility
What are the benefits of trading blocs? [5]
- Trade created between members
- Reduced transaction costs
- Economies of scale
- Enhanced competition
- Migration
How are transaction costs reduced in trading blocs?
There are no barriers to trade or border controls, so it is cheaper and more simple to trade.
How can firms gain economies of scale in trading blocs?
They can take advantage of a larger potential market to trade. By specialising, firms and countries can exploit their comparative advantages and the gains of efficiency can be obtained.
Why is enhanced competition from trading blocs good?
Since firms operate in a more competitive market, they become more efficient and there is a better allocation of resources. There could be long run benefits of dynamic efficiency.
