Specialisation and Trade Flashcards
(27 cards)
What is the effect of international trade on prices and the variety of goods/services?
International trade decreases prices and increases the variety of goods/services available to a nation
What is the result of increased international trade?
Higher standard of living
Who developed the theory of comparative advantage and in what year?
David Ricardo in 1817
What does the theory of comparative advantage state?
A country should specialise in the goods/services that it can produce at the lowest opportunity cost
What happens when a country specialises in production according to the theory of comparative advantage?
The volume of production increases
What can a country do with excess production?
Export it
What is absolute advantage?
When a country is able to produce a product using fewer factors of production than another country
Can a country have absolute advantage without having comparative advantage?
Yes
What should a country produce according to comparative advantage?
Goods/services in which it has comparative advantage
What are the assumptions of comparative advantage?
- Transport costs are zero
- There is perfect knowledge
- Factor substitution is easily achieved
- Constant costs of production
What does the production possibility frontier illustrate?
Comparative and absolute advantage
What is the opportunity cost of producing 1 computer chip for Country A?
2 t-shirts
What is the opportunity cost of producing 1 computer chip for Country B?
1 t-shirt
What is the comparative advantage of Country B?
Producing computer chips
What is the comparative advantage of Country A?
Producing t-shirts
What are some limitations of the theory of comparative advantage?
- Over-dependence
- Environmental damage
- Distribution of income
- Structural unemployment
What is a risk associated with over-dependence on international trade?
Vulnerability to geopolitical issues
How does comparative advantage affect income distribution?
The distribution of the extra income is likely to be uneven
What is structural unemployment?
Unemployment resulting from industry specialization leading to job losses in certain sectors
What are some advantages of international specialisation and trade?
- Lower prices
- Greater variety of goods/services
- More competition leads to better quality products
- Economies of scale create efficiencies
- Higher economic growth
- Improved living standards
What is a disadvantage of global monopolies?
They can dictate prices and output in many regions
What does exposure to external shocks mean in the context of trade?
Shocks to other economies have a knock-on effect due to interdependence
What does a deficit on the current account of the balance of payments indicate?
Some countries will import more than they export
What is a challenge for developing countries in international trade?
Start-up firms find it harder to compete due to global competition
