2.4.3 International trade Flashcards
(15 cards)
What is comparative advantage
They can produce a good at a lower opportunity cost to another.
When does Absolute advantage occur
When a country can produce more of a good with the same factor inputs.
Trading blocs: (there’s 4 on here)
- Free trade area
- Customs union
- Common market
- Monetary unions
What is free trade area
This is where countries agree to trade goods with other members without protectionist barriers.
- They allow members to exploit their comparative advantages, which increases efficiency.
What is customs union
Countries in a customs union have established a common trade policy with the rest of the world.
E.g. the EU
What is Common market
This establishes free trade in goods & services, a common external tariff & allows free movement of capital & labour across borders.
What is Monetary unions
- Members of a monetary union share the same currency.
- This is more economically integrated than a customs union and free trade area.
E.g. The Eurozone
Costs and benefits of trading blocs:
- Trade creation and trade diversion
- Reduced transaction costs
- Economies of scale
- Enhanced competition
- Migration
What does more trading blocs mean
Trade has been created between members, but diverted from elsewhere.
When does trade creation occur
When a country consumes more imports from a low cost producer, & fewer from a high cost producer.
When does trade diversion occur
When trade shifts to a less efficient producer.
Reduced transaction costs:
Since there are no barriers to trade or no border controls, it is cheaper and simpler to trade.
Economies of scale
Firms can take advantage of a larger potential market in which to trade.
Enhanced competition
Since firms operate in a more competitive market, they become more efficient and there is a better allocation of resources.
Migration
By being a member of a Customs Union, the supply of labour is increased, which could help fill labour shortages.
