1.1 Reasons for trade Flashcards
Why do differences in technology influence trade between countries?
Differences in technology determine each country’s ability to manufacture certain products, leading to specialization and trade to access goods not efficiently produced domestically.
How do differences in resource availability drive trade between countries?
Countries trade because they have varying amounts of resources like labor, capital, and land, which influences the goods they can produce efficiently.
What role do offshoring costs play in international trade?
Differences in offshoring costs influence trade by encouraging countries to produce parts of goods where it is cheaper and then assemble them in another location, optimizing production costs.
How does proximity affect trade between countries?
Countries trade more with nearby nations because shorter distances reduce transportation costs and time, making trade more efficient.
Ricardian Model
explains how the level of a country’s technology
affects its trade pattern.
Absolute advantage
When the country has the best technology for producing a good, it has an
absolute advantage in the production of that good.
* Absolute advantage is not a good explanation for trade patterns.
Comparative Advantage
Instead, comparative advantage is the primary explanation for trade among
countries.
* A country has comparative advantage in producing those goods that it
produces best compared with how well it produces other goods.
How will an unproductive economy be harmed by free trade?
An unproductive economy may be harmed by free trade – the most
popular and dangerous of all elementary economic fallacies.
Why?
* This view misunderstands one of the subtlest but most powerful
deductions in economic theory:
the principle of comparative advantage
Difference between absolute and comparaitve advanateg
- Absolute advantage is the ability of an individual, firm, or country to
produce more of a certain good than other competing producers, given
the same number of resource. - Comparative advantage is the ability of an individual, firm, or country to
produce a certain good at a lower of opportunity cost than other
producers.
Comparing individual opportunity costs is key to determining who has a
comparative advantage.
Opportunity Cost
The opportunity cost of producing something measures the cost of not
being able to produce something else.
When does a country have comparative advantage
A country has a comparative advantage in producing a good if the
opportunity cost of producing the good in that country is lower than it is
in other countries.
What did Ricardo demonstrate about international trade and tariffs?
Ricardo showed that countries could benefit from international trade without using tariffs. All countries gain from trade by exporting goods in which they have a comparative advantage.
How do all countries gain from trade according to the principle of comparative advantage?
All countries gain from trade by exporting goods in which they have a comparative advantage, allowing them to specialize and trade efficiently.
What was Ricardo’s argument about specialization and trade?
Ricardo argued that instead of producing a wide range of goods, countries could grow by specializing in the goods they could produce most cheaply and then trading those goods with other countries.
What is a PPF and what does it show
A production possibilities frontier (PPF) shows the relationship
between maximum production of one good for a given level of
production of another good.
Point on PPF
Attainable and efficient
Point inside PPF
Attainable an inefficient
Outside PPF
Unattainable
