2.6.2 Trade

Question 1

benefits of foreign trade

Answer 1

• access to cheaper goods and services
• greater range of “ “
• ability to reduce average costs through specialisation incresed comp

Question 2

absolute advantage

Answer 2

a country has absolute advantage in the productio of a product if it can be produced for a lower cost than in another country.

Question 3

comparative advantage

Answer 3

a country has comparative advantage in the production of a product ifit can be produced at a lower opportunity cost than in another.

Question 4

assumptions of the model of comparative advantage

Answer 4

• factors of production are immobile between countries
• perfect factor mobility exists within each country
• there are constant returns to scale - opportunity cost = constant.
• transport costs small enough not to cancel out benefits of specialisation and trade.
• no barriers to trade e.g. tarrifs, quotas

Question 5

protectionist polcies:

Answer 5

• quotas
• tarrifs
• export subsidies
• ‘red tape’

Question 6

protectionist polcies explained

tarrifs

Answer 6

placing tax on omports increases their price relative to domestic output - should lead to contradiction of D and encourage a switch to domestic substitutes

Question 7

protectionist polcies explained

quotas

Answer 7

restriction on the quantity of an import into the country

Question 8

protectionist polcies explained

export subsidies

Answer 8

a gov provides subsidies for firms that produce exports

Question 9

protectionist polcies explained

‘red tape’

Answer 9

= administrative barriers
placing regulations and other admin barriers make it harder for imports to enter the country. e.g. excessive checks at borders

Question 10

arguements for protectionist polcies

Answer 10

• protection of jobs
• infant industry arguement
• anti-dumping
• sunset industries
• strategic reasons
• customs unions
• the Single European Market

Question 11

arguements for protectionist polcies

protection of jobs

Answer 11

• jobs may be lost to lower-cost producers overseas
• protection = protects domestic jobs

Question 12

arguements for protectionist polcies

infant industry arguments

Answer 12

• smaller new established industries dont benefit from econs of scale
• protect them until they have growth and can compete

Question 13

arguements for protectionist polcies

anti-dumping

Answer 13

DUMPING = low cost producers dump large quantites of production to another countries market below cost price - leads to closure of firms
prevent harm to domestic businesses when faced with dumping by overseas low-cost producers
- seen as sunfair comp but hard to prove

Question 14

arguements for protectionist polcies

sunset industries

Answer 14

industries in LT decline may benefit from protection to allow them to decline more gradually rather than sudden manner - minimising shocks to domestic econ

Question 15

arguements for protectionist polcies

custom unions

Answer 15

• involve economic intergration and co-operation between 2 or more countries than are more closely intergrated than a free-trade area.
• major econ benefit = potential gain from free trade, allowing comsumers to access wider choice of goods and services at lowest possible price

Question 16

arguements for protectionist polcies

single european market

Answer 16

features
* free movements of goods and services
* free moveent of workers and capital
* common product standards and regualtions
* some fiscal or-ordination
* common external tarrif on imports into EU

Question 17

arguments for being outside EU

Answer 17

• trade diversion
• reduced threat to UK businesses from low cost producers withi the EU
• decisions may not be in interest of UK
• all members have to make financial contributions
• dont have to comply w/ EU regulations
• wages may rise due to reduced labour supply

Question 18

arguments for EU membership

Answer 18

• access to larger labour supply
• larger markest for business to sell in w no barrier
• trade creation
• potential economies of scale
• wider choice of goods for consumers
• free trade deals outside the EU may not be easy to achieve

Question 19

WTO

Answer 19

• over 150 members
• promotes trade liberalisation = tade without barriers
• organises talks as a process of trade barrier reduction
• attempts to mediate and settle disputes between members

Question 20

costs of trade (4)

Answer 20

1. The uncontrolled application of comparative advantage may mean that producers and countries over-specialise and become dependent on a few exports + over-reliant on imports.
2. Specialising in producing a narrow range of goods and services for the export market can increase the risk of structural unemployment as global demand and trade patterns change.
3. Production costs may rise as local producers are affected by diseconomies of scale.
4. Prices of goods and services are likely to fall as a result of increased competition, which increases consumer surplus and economic welfare.