Theme 4 - International economics

Question 1

What is the difference between absolute advantage or comparative advantage?

Answer 1

An absolute advantage is when a country an produce more of a good using the same resources an a comparative advantage is when a country can produce the goods at a lower opportunity cost

Question 2

How do we find the comparative advantage of a good numerically?

Answer 2

We divide the quantity of good A by country x by the quantity of good B for country x.

Question 3

How do we find the comparative advantage of a good grpahically?

Answer 3

The flatter slope has a comparative advantage for the good on the X axis and the steeper slope has a comparative advantage for the good on the Y axis.

Question 4

What is the theory of Comparative advantage?

Answer 4

A country that specialises in what they have a CA in, world output would increase

Question 5

Assumptions relating to the theory of comparative advantage

Answer 5

• Average costs remain constant
• There are no tariffs of transportation costs
• No exchange rates
• Lots of competition within the market
• There is always free trade

Question 6

Limitations relating to the theory of comparative advantage

Answer 6

• Could lead to diseconomies of scale
• Trade barriers may distort the price mechanism
• Real world transportation costs may distort CA

Question 7

What are the advantages of the theory of CA?

Answer 7

• Increased world output
• Economies of scale
• Lower prices and increased choice for consumer

Question 8

What are the disadvantages of the theory of CA?

Answer 8

• Unrealistic assumptions
• Demotivation of workers which could increase prices
• Over-dependence of exports and imports makes economies more susceptible to global shocks

Question 9

Advantages of specialisation and trade

Answer 9

• Increased world output
• Higher quality
• Increases trade which improves the current account
• Development of economies of scale

Question 10

Disadvantages of specialisation and trade

Answer 10

• Over-dependence on imports and exports
• Over-use of natural resources
• Increased structural employment

Question 11

What is the difference between static gains and dynamic gain?

Answer 11

Static gains is measuring something in point of time whereas dynamic gains is measuring in the long-term.

Question 12

What is international trade?

Answer 12

The exchange of goods and services between countries between economic agents in other countries

Question 13

What are the 4 Patterns of trade?

Answer 13

Comparative advantage, emerging economies, trade blocs and exchange rates

Question 14

Explain briefly the 4 patterns of trade

Answer 14

CA - Increase exports for a country that specialises in the production of that good
Emerging economies - import and export more to increase real GDP.
Trade blocs - Allow free trade so when tariffs fall, trad increases
ER - Weak ER, increases exports, improving current account

Question 15

What are terms of trade?

Answer 15

The relationship between the price of exports a d the price of imports

Question 16

What is the terms of trade formula?

Answer 16

Index of exported prices/index of imported prices X 100

Question 17

What improves terms of trade?

Answer 17

When exports increase of imports decreases

Question 18

What deteriorates terms of trade?

Answer 18

When exports decrease or imports increase

Question 19

What are the 4 factors impacting terms of trade?

Answer 19

• Raw material prices
• Tariffs
• Exchange rates
• Inflation rates

Question 20

What are the aims of trade blocs?

Answer 20

To remove: Quotas, tariffs, subsidies to domestic products and non-tariff barriers.

Question 21

What are free trade areas?

Answer 21

These are areas such as NAFTA and the EFTA that don’t have trade barriers therefore free trade is allowed in these areas.

Question 22

What are customs unions?

Answer 22

These are trade blocs such as the EU and the South Africa customs union which also has removed trade barriers but also have to place a common external tariff on exported goods to non-member countries.

Question 23

What are common markets?

Answer 23

For example the European single market includes all EU members plus 4 other countries. They are the same as customs unions but they also allow the free movement of factors of production between member countries.

Question 24

What are monetary unions?

Answer 24

For example the Eurozone contains 19 members of the EU. They all have the same characteristics of a customs union but they all share the same currency so, the Euro. Another monetary union includes the Eastern Caribbean currency union

Question 25

What is trade creation?

Answer 25

When a tariff is removed, this decreases the price of goods and services. This fall in price means there is a contraction in domestic supply but an increase in domestic demand. This leads to demand for imported goods to increase as excess demand must be met so trade increases.

Question 26

What is trade diversion?

Answer 26

When a common external tariff is put in place, the price of imports from a non-member country will decrease because it is more expensive than importing from a member country. This means that trade is diverted from low cost producers to high cost producers.

Question 27

What are the negatives of trade diversion?

Answer 27

Trade member countries have to pay a higher price which may decrease quantity demanded and living standards. Non-member countries may see a reduction in trade which could lead to a fall in revenue and a worsening in the current account and so, leading to a negative multiplier effect.

Question 28

What are 3 prime examples of trade barriers implemented by countries?

Answer 28

- Tariffs - Quotas - Subsidies to domestic firms

Question 29

Explain what happens to S and D when a tariff is put in place

Answer 29

When a tariff is put in place, the price increases which increases suppliers incentive to supply but higher prices causes demand to contract. Trade then decreases inwards

Question 30

What does a,b,c,d stand for ono the demand and supply diagram

Answer 30

A = Producer gain B + D = Net welfare loss C = Tax revenue gained

Question 31

What is a quota?

Answer 31

A physical limit on the number of imported goods

Question 32

What does the quota diagram show?

Answer 32

When a quota is put in place, domestic supply increases which pushes up the domestic prices causes a contraction in domestic demand.

Question 33

What is a major drawback of a quota?

Answer 33

No extra tax revenue is gained by the government

Question 34

Describe what happens when a domestic subsidy is put in place

Answer 34

This causes domestic supply to increase and prices become cheaper which also increases domestic demand however trade decreases and the government will be spending more money

Question 35

What are non-tariff barriers?

Answer 35

Label regulation, environmental regulation and health and safety

Question 36

What are 3 main reasons why free trade may be restricted?

Answer 36

- Prevention of dumping - protecting domestic employment - protecting infant industries - Health and safety

Question 37

What is dumping? How can it be prevented

Answer 37

This is predatory pricing but if a tariff is put in place, this raises the prices of the imported good

Question 38

Why is protecting domestic employment important?

Answer 38

If a trade barrier is put in place, then production for that good may decrease. This harms people who work at production processes of the goods

Question 39

What is an infant industry?

Answer 39

An industry that is too small to benefit from economies of scale

Question 40

Impact of a tariff on consumers, producers, government, living standards and equality

Answer 40

``` C = High prices, buy from domestic firms P = increase in raw material price, increase COP G = Higher tax revenue gained LS = Can't afford imports so have to pay high domestic price E = Poorer will get poorer from high prices ```

Question 41

Impact of a quota on consumers, producers, government, living standards and equality

Answer 41

``` C = Shortages could increase prices P = Foreign producers can't export as much, domestic benefit G = No extra tax revenue LS = Domestic higher prices may be hard to afford E = rich get richer, poor get poorer ```

Question 42

Impact of a subsidies on consumers, producers, government, living standards and equality

Answer 42

``` C = benefit from low prices domestically P = cheaper cost of production, EOS G = More money spent, expanding industries increases long run growth LS = Increase employment, more competitive E = decease in inequality gap ```