4.1.2 Specialisation and Trade Flashcards
(25 cards)
Why does International Trade take place? (4)
- Differences in Factor Endowments
- Some countries produces goods at different prices to others
- Product Differentiation
- Political Reasons
What are Factor Endowments?
Resources/FoP available in a country.
Why can some countries produce goods more cheaply? (3)
- The availability of natural resources
- The skills of the workforce
- The quality of the physical capital in the economy
What is Product Differentiation?
Many traded goods are similar but not identical and the differences may mean that some consumers in a country will want to buy products from another even if they are the same price. International Trade provides consumers with a much wider choice of products so the same basic G+S can differ in a variety.
What are the Political Reasons for International Trade? (3)
- Trade deals to lock suppliers into doing business with each other
- Embargoes on trade with another country
- Trade Blocks e.g. EU, NAFTA
What is Comparative Advantage?
Differences in Costs of Production between countries. (Lower opportunity cost of producing)
What is the impact of emerging economies?
Emerging economies are middle-income countries that have high growth rates, meaning they are rapidly expanding their share of trade. Countries grow over time but not at a uniform rate. As they grow, they are more likely to import more G+S and will need to export more to pay for these.
What is Absolute Advantage?
Exists when a country is able to produce a good more cheaply in absolute terms than another country. (Fewer resources, Lower costs)
What is the Theory of Comparative Advantage?
Countries will find it mutually advantageous to trade if comparative costs of production differ. However, if comparative costs are identical, no gains can be made from trade.
What are assumptions of the Theory of Comparative Advantage? (6)
- Assumes there are no transportation costs- in reality these are always present and they may reduce/eliminate comparative cost advantages
- Assumes costs are constant, there are no economies of scale
- Assumes only these 2 countries produce only 2 goods
- Assumes traded goods are homogeneous
- Assumes FoP are perfectly mobile
- Assumes there is perfect, symmetric information
What section of the graph represents the mutual advantage?
Shaded
Who came up with the Labour Theory of Value?
Ricardo
What is the Labour Theory of Value?
All costs can be ultimately reduced to labour costs. Therefore, the price of a good can consequently be measure in terms of workers hours of production. Therefore, differences in comparative costs actually reflect the differences in labour productivity.
Why does Comparative Advantage occur? (4)
- Labour Theory of Value
- Countries with high labour productivity have a comparative advantage in high-tech goods whilst those with low productivity have the advantage in low-tech goods
- Neo-classicals would state labour is not the only cost, the forces of scarcity also matters
- Heckscher and Ohlin believed that different costs were the result of a combination of different endowments
What are non-price theories of trade? (4)
- Comparative Advantage Theory
- Commodities are homogeneous, so their only main determinant of demand is price, but manufactured goods/services are non-homogeneous
- Preference Similarity Theory
- Domestic firms still have local knowledge advantage over foreign competitor in terms of the needs of consumers
What is Preference Similarity Theory?
Many manufactured goods are imported not because they are relatively cheaper to produce but because consumers often want greater choice than what can be offered by domestic manufacturers alone.
What are the benefits of trade? (4)
- Specialisation
- Economies of scale maximised
- Consumer choice
- Innovation
What are the Costs of Trade? (7)
- Over dependence
- Job Losses
- Risk
- Distribution of income
- Environmental Degradation and unsustainable development
- Loss of Sovereignty
- Loss of Culture
What was the UK known as in the 20th Century?
The workshop of the world- due to importing raw materials and exporting manufactured goods
What happened to the UK in 1995?
The UK lost its comparative advantage, reflected in a significant increase of the imports of manufactured good- 23.2% to 82% in 1996
What happened to the UK in the 70s and 80s?
Deindustrialisation, the closure of major parts of the manufacturing sector, inability to compete with countries such as Germany and Japan
What does the UK have a large factor endowment of?
Land- Large oil sector as a result of North Sea oil, with the first extraction in 1975 commercially
What happened to the UK between 1975 and 85?
Exports of fuels rose from 4.2% to 21.5% of total exports, while imports fell from 17.5% to 12.8%.
For services, what are the advantages and disadvantages of the UK?
Since 1975, the UK has had a comparative advantage in the financial and insurance sectors. In 2013 25% of total service exports were financial services. However, the UK has disadvantage in travel and tourism as more UK tourists want to take holidays abroad than foreign citizens coming to the UK.
