International Economics

Question 1

Advantages of comparative advantage

Answer 1

• lower prices – lower costs of production
• maximum output of goods and services produced in the world as countries divert resources away from inefficient production towards efficient - produce beyond PPF
• CHOICE + CONSUMPTION possibility
• allocative efficiency

Question 2

Factors influencing pattern of trade

Answer 2

• trading blocs and bilateral trading agreements
• emerging economies
• relative exchange rate
• comparative advantage

Question 3

What is deterioration

Answer 3

When export prices fall, and import prices rise

Question 4

What is meant by an improvement in the terms of trade

Answer 4

country can buy more imports with the same level of exports

Question 5

Caclculation for terms of trade

Answer 5

Average export price / average import price x 100

Question 6

Factors influencing terms of trade

Answer 6

SR
- exchange rates, inflation
- demand/supply of I/e

LR
- changing incomes
- Prebish-singer hypothesis - long run price of primary goods decline relative to manufactured goods so countries dependent on primary exports see deterioration in TOT
- improvement in productivity

Question 7

Impact of improvement in terms of trade

Answer 7

• fall in GDP - improvement due to high export prices, low import prices means exports will fall, imports rise - leads to reduction in production, less jobs so unemployment
• improvement would improve CA if PED for i and e are inelastic BOP good
• look at cause (international compettivness causes deteoriation good for economy)

Question 8

Adv and Dis of Monetary/Economic Unions

Answer 8

adv
- reduced exchange rate costs
- easier for prices to be compared across the union so MNCs cannot price discriminate

dis
-loss of policy indepndence
- financial costs starting new currency + union if breaks up costs
- what is good for one country may not be good for another
-automatic fiscal transfers when one country performing poorly

Question 9

Disadvanatges of trading blocs and bilateral trading agreements

Answer 9

• retaliation
• trade diversion
• distort world trade
• less of national soverignty
• trading blocs second best solutiton in a world with protectionism, economic maximised if there were no barriers to trade

Question 10

Defintion of trade creation

Answer 10

Movement from a high cost domestic proudcer to a low cost producer within the customs union

Question 11

Advantages of world trade organisation

Answer 11

• protects infant industries
• prevents potential dumping - (excess supply sellf cheap to another country harming their domestic producers)
• terms of trade

Question 12

Non-tariff barriers

Answer 12

• import licensing
• embargos
• legal and technical standards
• voluntary export restraint agreements