Theme 4.1.2 Flashcards
(7 cards)
Define international trade
Involves the exchange of goods and services across international boundaries
Describe the concept of Absolute Advantage
Concept associated with Adam Smith
A country will have an absolute advantage when its output of a product is greater per unit than any other country or if it can produce a unit of output using the least amount of input than any other economy.
Describe the concept of Comparative advantage
Concept associated with David Ricardo.
A country has a CA if the domestic opportunity cost of it producing a good is lower than the opportunity cost for other countries.
Give the advantages of specialisation and free trade
Increased choice (increase in allocative efficiency) as increased global competition leads to lower prices for consumers and an increase in CS.
Increased profits from global sales may lead to dynamic efficiencies over time.
Increased global competition leads to increased productive efficiency.
Explain the disadvantages of specialisation and free trade
Developing economies may face problems — e.g infant industries may not be able to compete and go out of business- the monopsony power of global companies may mean that low prices are paid for commodities from developing countries (monopsony diagram?)
If a countries g&s are uncompetitive — lead to persistent trade deficits (X<M) in their balance of trade which could lead to unemployment.
Increase risk of foreign firms dumping any unsold stock in the domestic economy at a price below average cost of production (an attempt to minimise their losses). This could lead to increased unemployment in the domestic industries affected.
Limitations / Evaluation of Comparative Advantage
Perfect knowledge - assumes consumers will always know/buy where the lowest prices are.
Assumes no transport costs - distorts CA- assumes a country may have a cost adv and the efficiency they can produce at is better and therefore the final process is lower than other nations - if we + on the fact that there may be huge transport costs for other nations to buy those products- distorts /erodes their adv and make the nation less competitive.
Assumes no EOS- distorts CA- maybe a country that doesn’t have CA is able to exploit EOS better than a nation who does have the CA-> this could distort the CA gains as if there are EOS then whoever benefits from them can benefit from lower average costs + lower prices.
Rates of inflation ignored- distorts CA- a country’s CA may be eroded if inflation rates = high.
Main limitation of CA
Negative externalities such as environmental degradation are ignored
