1.1.1 Trade - Intro and Benefits

Question 1

What is the definition of trade?

Answer 1

Trade is the exchange of goods and services between economic agents

Question 2

What is the difference between static and dynami gains?

Answer 2

• Static gains - improvements in allocative and productive efficiency.
• Dynamic gains – the gains in welfare that occur over time from improved product quality, increased choice and a faster pace of innovative behaviour

Question 3

Name 4 different gains from trade?

Answer 3

• Lower Prices
• Economies of scale
• Increased global wealth
• Incresed demand and job creation

Question 4

Explain Lower Prices (Gains of trade)

Answer 4

a key gain from trade is the ability to buy goods and services at a lower price than the domestic one. Consumers can buy less expensive products and producers are able to buy less expensive raw materials.

Question 5

Explain Economies of Scale (Gains of Trade)

Answer 5

• With an increase in the market size and therefore increased demand, firms can exploit economies of scale, and maybe improve their productive efficiency.
• Multinational corporations (MNCs) can move their factories etc. to countries with lower wage costs, thereby reducing their costs.
• The role of MNCs is an important one and we will return to this later (see Globalisation notes)

Question 6

Explain increased global wealth (gains of trade)

Answer 6

• the Law of Comparative Advantage (see later notes) states that gains can occur in almost any situation if countries specialise and focus on producing the goods they are relatively best at producing.
• There has been a movement led by international organisations (e.g. World Trade Organisation) to increase unrestricted trade; this has allowed countries to exploit comparative advantage, leading to increased world output and global wealth.

Question 7

Explain increased demand and job creation (gains of trade)

Answer 7

• if a country opens up its economy to international trade, domestic firms will experience an increase in demand for the goods and services they produce.
• This increased demand will lead firms to raise output and as such employ more labour, to facilitate the production of this higher level of output.