Flashcards in Unit 4: Chapter 1 - Why trade? Deck (76)
What is free trade?
This occurs when there are no barriers to trade
What is an example of a barrier to trade?
Taxes on imported goods AKA tariffs
What is a benefit of free trade in terms of comparative advantage?
World output can be increased if countries specialise
What is a benefit to free trade in terms of economies of scale?
Trade allows economies of scale to be maximised therefore costs per unit are reduced as small countries can buy goods in bulk - at the same time they can produce and export goods where they have developed economies of scale
What is a benefit of free trade in terms of choice?
Can choose a wider range of goods therefore consumer welfare is increased
What is a benefit of free trade in terms of innovation?
More competition with firms abroad which provides a powerful incentive to innovate - consumer welfare increases again, firms will compete to find production methods which cut costs and improve quality
How does specialisation encourage innovation?
Countries become experts in their fields
What does a lack of free trade lead to?
Domestic markets being dominated by a few firms
What is a benefit of free trade in terms of PPFs?
It allows countries to have more than their PPFs allow
What is a cost of free trade in terms of overdependence?
Countries can become overdependent on foreign trade e.g. small countries can become overdependent on one or two commodities they are exporting, if the price of these commodities were to fall then these countries could suffer a big fall in GDP - this is known as primary product dependency
What is a cost of free trade in terms of jobs?
Changes in demand can lead to unemployment
What is a cost of free trade in terms of risk?
Demand for a country's exports may fall or supplies can be cut by a foreign country, there can be credit crises which cut off finance for a country
What is a cost of free trade in terms of the environment?
Trade and increased output can lead to environmental degradation and unsustainable development which leads to negative externalities
What is a cost of free trade in terms of income distribution?
The benefits of trade may go mainly to the rich elite within a nation thus widening inequality and if the benefits of trade go mostly to another country then a nation may find itself less well off
What is the theory of absolute advantage?
All nations could gain simultaneously if they practiced free trade and specialised in the production of goods they were 'best' at producing
When is a country said to have an absolute advantage over another country?
If it can produce more of a good using the same amount of resources
What is the opposite of the theory of absolute advantage?
Mercantilism which encourages protectionism and self-sufficiency
With what condition would both countries (involved in the theory of absolute advantage) be better off through specialisation?
Provided they were willing to trade those goods in which they had a natural or acquired advantage
What is the theory of comparative advantage?
Even when one country has an absolute advantage in the production of both goods, it is still possible for trade to be beneficial for both countries
When is a country said to have a comparative advantage over another in the production of a good?
If it can produce it at a lower opportunity cost
What are different opportunity costs represented by graphically?
What does the theory of comparative advantage allow for?
A country to consume on a point outside its own PPF and a more efficient use of scarce resources
What is the circumstance in which trade is not viable?
When both countries have identical opportunity costs as the slopes of the PPFs would be identical and therefore no comparative advantage would exist
What are the factors that affect a nation's comparative advantage and competitiveness?
Training, research and development, tax regimes, wages, exchange rates
What could ever-increasing specialisation lead to?
Diminishing returns which limits the gains from specialisation
What is a natural limitation that prevents a country from exploiting the gains of trade?
How have transport costs become less of a limitation of exploiting the gains of free trade?
The costs of moving freight by air or sea continue to fall
Why may countries be unwilling to become too specialised?
Fear that this will make them too dependent on other countries
Why could specialisation become a particularly acute problem?
If political tensions arise between countries or at the extreme, in the event of war