14.2 Trade Flashcards
What is absolute advantage?
A country has an absolute advantage of it can produce more of a good than other countries from the same amount of resources
What helps to show the principle of comparative advantage benefiting international specification and free trade?
Look at the related concept: absolute advantage
Table to show absolute advantage:
Each country has two units of a resource
Atlantis has an absolute advantage in producing guns but Pacifia has an absolute advantage for butter production
Production without specialisation?
Splitting resources 50/50 between two goods
Diagram for production with specialisation
Output gain from complete specialisation?
Output gains translate to gains in trade depending on two factors, what are they?
Administration and transport costs occur whenever trade takes place (as a result the net gains from trade are?
Net gains of trade
(3 guns+4 tonnes of butter) -transport and administration costs
When are specialisation and trade not worthwhile?
If transports and administration costs exceed the output gains resulting from specialisation
What is needed for trade to occur?
Demand on both sides for the respective good
(Assume each country exports surplus to country’s when it has satisfied its inhabitance demand for goods in which it specialises)
What is a comparative advantage?
It is measured in terms of opportunity cost. The country with the least opportunity cost when producing a good possesses a comparative advantage in that good
Diagram for an absolute advantage in two goods
Although Atlantis has an absolute advantage in producing guns and butter he has a comparative disadvantage in the production of butter
This is because a comparative advantage is measured in in the terms of opportunity cost, (what a country gives up by reducing income by one unit)
When a country possesses an absolute advantage in two goods where does the comparative advantage lies?
In producing the good where the absolute advantage is greater
When does a country with an absolute disadvantage in tow products hold a comparative advantage?
In the product where the absolute advantage is less
Diagram for a comparative advantage for gun production while another country has a comparative advantage in butter production
When a country has an absolute advantage in both goods does complete specialisation in accordance with the principle of comparative advantage result in a net output gain and why?
No because the output of one good rises whilst the output of the other decreases
What can produce a net output gain?
Partial specialisation
Who came up with absolute advantage?
Adam smith
Who came up with the comparative advantage?
David Ricardo
Ricardo believed that a country can reach its full potential (living standards, maximising output, welfare) ect?
If the market economy is truly international(county should specialise in activities where it possesses a comparative advantage
What are the 3 underlying assumptions of the comparative advantage?
-each country’s factors of production is fixed and immobile between countries (in the case of international trade, finished goods rather than factors of production or inputs are assumed ro be mobile between countries
-demand and cost conditions are relatively stable. Over specialisation can lead to a country being vulnerable to sudden changes in demand or changes in cost and availability in cost of raw materials (changes in cost eliminate a country’s comparative advantage)
-there are constant returns of scale(increasing returns of scale-the more a country specialises in a activity it has an absolute advantage the more it’s productive efficiency increases)(if there are decreasing returns of scale specialisation erodes efficiency and destorys a country’s initial advantage)
When does a country enjoy a competitive advantage?
When it produces better-quality goods at lower costs and better prices than its rivals
(More similar to absolute advantage than comparative advantage
What creates a competitive advantage?
Dynamic factors that promote the growth of firms.
Successful investment undertaken over many years equips a country work a modern production capacity capable of producing high quality goods people want to buy
What can import controls be divided into?
Quantity controls such has quotas which puts a maximum limit on tariffs or import duties(and their opposite export subsidies)
Which raise the price of imports or produce the price of exports
Quotas?
Physical limits on quantities of imported goods allowed into a country
Diagram for consumer and producer surplus of a closed economy
Diagram for welfare gains and losses after the introduction of a tariff
Describe this diagram
Imports priced at Pw (lower than p1)m equilibrium at point V
Although domestic demand has increased to QD1 domestic supply falls to QS1
Imports (QD1-QS1) Gil other gap between domestic demand and supply
How does imports affect economic welfare?
(Must first understand consumer and producer surplus affected when change of price falls to pw
Consumer surplus increases by yellow and green (B+C)
B shows a transfer away to domestic firms to domestic consumers
The fall in price is brought about by lower import prices means that part of the producer surplus becomes consumer surplus
Consumers also gain Cm net welfare gain =C
The effect of imposing a tariff (diagram)
If the tariff equals distance between p1 and pw the domestic market for goods reverts for the original equilibrium position that existed before the imports entered the country
But if there is a smaller tariff producers charge pw+t and domestic demand falls to Qs2
At higher price consumer surplus falls -D and B are the areas of transfer of wealth away from consumers to domestic producers
Net lose measured by triangles A and C.
Diagram for trade with EU and non EU countries 2017
Diagram for UK imports and exports 2018
