International Trade

Question 1

what is international trade?

Answer 1

the exchange (buying and selling or importing and exporting) of goods and services across international territories.

Question 2

what is an open economy?

Answer 2

an economy where international trade takes place (i.e. exports and imports)

Question 3

what is a closed economy?

Answer 3

an economy that does not trade internationally

Question 4

why do countries trade?

Answer 4

• to obtain essential raw materials (oil)
• to achieve economies of scale
• because our climate is unsuitable for certain goods (citrus fruits)
• to obtain a variety of goods
• to benefit from the skills/traditions of another workforce
• create more employment
• increase standard of living
• benefit from specialization of labour

Question 5

what is the Law of Absolute Advantage?

Answer 5

…states that each country should specialize in the production of that good in which it has an absolute advantage.
i.e. if it can produce the good more efficiently/cheaply (at a lower cost) than other countries.

Question 6

what are assumptions of the Law of Absolute Advantage ?

Answer 6

°there are 2 countries
°there are 2 products produced 
°no transport cost exists
°1 factor of production (labour)
°free mobility of labour 
°no LDMR

Question 7

what is the Law of Comparative Advantage?

Answer 7

…states that a country should specialize in the production of those goods and services in which it is relatively most efficient and trade for the remainder of its requirements.

Question 8

terms of trade (formula)

Answer 8

index of export prices divided by index of import prices

Question 9

what are terms of trade?

Answer 9

refer to the ratio between the average price of exports and the average price of imports

Question 10

how can the terms of trade improve?

Answer 10

1. if export prices are rising faster while import prices remain the same
2. if export prices are rising faster then import prices
3. if import prices fall while export prices stay the same

Question 11

what are the assumptions/limitations of the Law of Comparative Advantage?

Answer 11

• strategic reasons in favor of self-sufficiency are ignored
• transport costs are ignored
• perfect mobility of the FoP is assumed
• the LDMR is ignored
• free trade is assumed to exist
• alternative employment is available
• equal distribution of benefit occurs

Question 12

sources of comparative advantage for the Irish economy.

Answer 12

climate,
raw materials,
educated & skilled workforce,
low rate of corporation tax

Question 13

how does specialization encourage international trade?

Answer 13

°greater efficiency in the allocation of scarce resources
°greater interdependence
°increased wealth and rising aggregate demand
°lower costs and prices
°division of labour
°economies of scale

Question 14

what factors affect the competitiveness of Irish-based firms involved in international trade

Answer 14

1. rate of inflation (if ours is high- its bad for exports)
2. exchange rate (if our currency is expensive - nobody wants to buy our goods)
3. transport cost (Ireland is an island)
4. production costs
5. labour costs
6. infrastructure cost

Question 15

importance of international trade to the Irish economy.

Answer 15

economic growth,
increased standard of living,
variety and choice of goods/services,
more competitive prices,
employment/investment opportunities,
economies of large-scale production,
more efficient use of scarce resources

Question 16

define exporting

Answer 16

the production and sale of Irish goods/services to other countries

Question 17

what are visible exports?

Answer 17

goods sold to other countries

e.g.beef, butter, pharmaceuticals

Question 18

define importing

Answer 18

buying foreign-produced goods and services

Question 19

what are visible imports?

Answer 19

goods that are bought from foreign countries

e.g. wine, cars, tea, coffee, citrus fruits

Question 20

what is the balance of trade?

Answer 20

the difference between the value of visible exports and visible imports (goods)

Question 21

what are invisible exports?

Answer 21

services sold to other countries

e.g. an Irish band playing a concert in London, Spanish students studying here, a French family holidaying here

Question 22

what are invisible imports?

Answer 22

services that are bought from foreign countries

e.g. a foreign singer performing in Dublin,
an Irish family holidaying in France

Question 23

what are benefits of imports to the Irish economy?

Answer 23

increased choice of goods and services,
lower prices for consumers,
access to raw materials,
domestic production would be too expensive

Question 24

what are benefits of exports to the economy?

Answer 24

exporting creates employment,
money flows into the economy,
gives firms access to larger markets,
investment increases

Question 25

what are implications for Ireland as a small open economy

Answer 25

* inadequate infrastructure * skilled labour shortages * increased costs * dependance on foreign markets for survival * housing crisis

Question 26

what is free trade?

Answer 26

free trade states that there are no barriers to the movement of goods and services between countries

Question 27

economic justifications of restricting free trade

Answer 27

- to create/protect domestic employment - protect indigenous firms/infant industry - protect against low-wage competition - to increase government revenue - retain wealth within the country/protect the balance of payments - prevent 'dumping' - protect the nation - strategic purposes - political reasons - senile industry argument

Question 28

what is dumping?

Answer 28

occurs when goods from a country are sold abroad at a lower price than the price charged for them at home

Question 29

what is protectionisms?

Answer 29

refers to efforts by a government to restrict free trade, particularly imports

Question 30

what barriers can the government introduce to prevent imports?

Answer 30

tariffs quotas administrative barriers trade embargo

Question 31

what are tariffs?

Answer 31

a tax on imports makes imports more expensive and may make a domestically produced alternative relatively cheaper (import substitution). is an important source of government revenue.

Question 32

what are quotas?

Answer 32

a physical limit placed by a government on the amount of a certain good allowed to enter the country.

Question 33

what are administrative barriers?

Answer 33

obstacles including paperwork, bureaucracy and red tape that a government puts in place to create inconvenience for the importer in the hope that they will be discouraged from importing

Question 34

what is a trade embargo?

Answer 34

a complete ban on the importing of a particular good or goods from a country or a total ban on all trade to and from a particular country e. g. all trade embargo between Us andbCuba e. g. fireworks into Ireland

Question 35

what is a trading blog?

Answer 35

a group of countries sharing free trade agreements with each other. e.g. European Union, NAFTA , APEC

Question 36

what is the WTO ?

Answer 36

World Trade Organization - consists of 153 countries(including Ireland) - promotion of free trade - principle of non-discrimination

Question 37

what are the objectives of the WTO?

Answer 37

- reduce & eliminate all barriers to world trade - promote fair trade - negotiate with governments of member states - arbitration in international trade disputes between member states

Question 38

what are benefits of the WTO?

Answer 38

- helps to promote peace - handles things peacefully & constructively - reduces some inequalities - reduces cost of production - provides more choice of goods and services - increases national & personal income - stimulates economic growth