Trade

Question 1

What is international trade

Answer 1

The exchange of products (goods and services)

Question 2

What is free trade

Answer 2

International trade free from artificial barriers such as import tariffs, quotas and other trade barriers

Question 3

What is specialisation (trade)

Answer 3

Specialisation of scarce resources

Question 4

What is exchange (trade)

Answer 4

Based on comparative advances in supply different goods and services

Question 5

David Ricardo

Answer 5

19th century - proposed a theory of comparative advantage as a key economic argument for international trade

Question 6

Dynamic gains from free trade

Answer 6

• allows comparative advantage and specialisation
• dynamic gains
• spread of knowledge and technology
• economies of scale
• competition and innovation
• cheaper products

Question 7

Key gains from trade

Answer 7

• export revenues and jobs
• increased market contestability
• better technology access
• inflows of knowledge across borders

Question 8

Why is trade important for developing countries

Answer 8

• source of foreign currency = improve balance of payments
• financing imports of essential imports of capital equipment / technologies and energy supplies
• injection of demand into the circular flow
• increased employment in export industries and rising incomes

Question 9

Risks of trade & investment for developing countries

Answer 9

• volatile prices
• risks exports will be affected by geo-political uncertainties and cyclical volatility
• volatile capital flows
• structural unemployment
• resource curse trap

Question 10

Risks from openness to trade

Answer 10

Transport costs
Rising inequality
Negative externalities
External shocks

Question 11

What is absolute advantage

Answer 11

This occurs when a country can produce a product using fewer resources than another nation - if a country can produce more with the same factors of production

Question 12

What is comparative advantage

Answer 12

When a country has lower relative opportunity cost when it decides to specialise in a particular product

Question 13

Examples of countries that heavily specialise in key industries

Answer 13

Bangladesh - textiles

Ivory Coast - cocoa

Question 14

Gains from specialisation

Answer 14

If it’s countries specialise according to comparative advantage, and assuming constant returns to scale, than total output can rise