9) Evaluate comparative advantage as an explanation of international trade patterns - MMT

Question 1

what is international trade?

Answer 1

International trade incorporates the buying and selling of goods and services across international boundaries.

Question 2

what are exports?

Answer 2

Sales made from one country to another are known as exports

Question 3

what are imports?

Answer 3

purchases made in one country from another are known as imports.

Question 4

when has the volume and value of international trade increased?

Answer 4

Since the 1970s, as a result of globalisation, the volume and value of international trade has increased by a very large amount.

Question 5

what is absolute advantage?

Answer 5

Absolute advantage is when a country produces a commodity with the best quality and at a faster rate than another.

Question 6

what is comparative advantage?

Answer 6

comparative advantage is when a country has the potential to produce a
efficierd particular product better than any other country.

Question 7

how do we measure potential in comparative advantage in economics?

Answer 7

using opportunity cost

Question 8

For example, country A (say the USA) may be better at making both cars and aeroplanes than country B (say Brazil). However, the USA might be 10 times better than Brazil at aeroplanes and 2 times better at cars. Therefore, the USA is relatively better at aeroplanes, Brazil is relatively better at Cars.

The theory of comparative advantage states that countries gain an international trade advantage when…

Answer 8

they focus on producing goods that produce the lowest opportunity costs as compared to other countries - as the USA is so good at making planes, allow them to specialise in that.

Question 9

what is protectionism?

Answer 9

the opposite of Globalisation, distracts them by having to focus on making things that other countries can do just as well

Question 10

If everyone specialises at the thing they’re relatively best at and then what will happen?

Answer 10

If everyone specialises at the thing they’re relatively best at and then everybody trades with everyone else overall output for the world be a great deal higher.

Question 11

how relative is comparative advantage in the 21St century? what are the 3 arguements?

Answer 11

1. still vital
2. becoming less important
3. verdict

Question 12

how relevant is comparative advantage in the 21st century?

Answer 12

the law of comparative advantage is often used to justify globalisation, since countries can have higher material outcomes by producing only goods where they have a comparative advantage, and trading those goods with other countries

Question 13

how relevant is comparative advantage in the 21st century? for example in China:

Answer 13

Countries like China have made major productivity gains by specialising their economies in certain export-focused industries, where they had a comparative advantage. This theory has helped many emerging economies achieve rapid growth, whilst its has also helped developed economies to increase real GDP whilst moving away from the areas that initially made them rich.

Question 14

how relevant is comparative advantage in the 21st century? how does it help to explain the structure of the world economy? include examples

Answer 14

developed economies dominated by the tertiary sector, emerging economies like India and Bangladesh becoming industrialised whilst developing economies become more and more focused in the areas they are good at (e.g. DCR-minerals/Ivory Coast-Cocoa Beans).

Question 15

what are the main points that comparative advantage in the 21St century is still vital?

Answer 15

1. justify globalisation
2. productivity gains - export focused industries
3. rapid growth for emerging
4. developed economies - increase real GDP, move away from areas
5. explain structure of world economy

Question 16

how is comparative advantage becoming less important in the 21st century?

Answer 16

several recent events served to highlight the weaknesses of comparative advantage as the basis for international trade.

I) security concerns
li) Growth of protectionism
iii) Growth of trading blocs such as the EU

Question 17

how is comparative advantage becoming less important in the 21st century?

security concerns example

Answer 17

for decades Europe was happy to rely on Russia to specialise in meeting its energy needs. The last 12 months have alerted countries to the dangers of that; UK, France, Germany and many others are now seeking ways to produce their own energy.

Question 18

how is comparative advantage becoming less important in the 21st century?

growth of protectionism example

Answer 18

Donald Trump came to power in the USA promising MAGA- make America great again. This would require him to overturn the law of comparative advantage e.g. by re-opening inefficient US steel plants. Protectionism is incompatible with comparative advantage

Question 19

how is comparative advantage becoming less important in the 21st century?

growth of trading blocs such as the EU example

Answer 19

In 1963 there were 6 countries in the EU- today there are 28. These countries can trade freely with each other but they place tariffs on outside countries. So, Irish consumers buy Spanish oranges (no tariffs) even though South African oranges (tariffed) are more efficiently grown and should be cheaper. Comparative advantage often disadvantages developing economies

Question 20

what is the verdict of if comparative advantage is still relevant in the 21st century?

Answer 20

The relevance of comparative advantage varies according to the type of product. The more strategically important a good or service is the less the influence of comparative advantage in its trade patterns. In practice, politics/ changing circumstances is a big enemy of comparative advantage.