Unit 4: Chapter 1 - Why trade? Flashcards Preview

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Flashcards in Unit 4: Chapter 1 - Why trade? Deck (76)
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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?

Different gradients


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?

Transport costs


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


What are some evaluation points on the theories of absolute and comparative advantage?

Transport, strength of the exchange rate, the type of goods that are being exchanged e.g. perishable and single buyer/seller leads to distorted power