3.1 International Trade

Question 1

What is free trade?

Answer 1

Occurs when nations can exchange goods and services without any trade barriers.

Question 2

What is international trade?

Answer 2

The exchange of goods and services beyond national border it involves the sale fo exports and imports.

Question 3

What are exports?

Answer 3

Goods and service sold to overseas buyers.

Question 4

What are imports?

Answer 4

Foreign goods and services brought by domestic households and firms.

Question 5

Why do countries need to trade?

Answer 5

Because scarce resources are unevenly distributed between counties.

Question 6

Why do economists argue that free international trade is a good thing?

Answer 6

That the benefits excess the costs, not everyone gains or gains equally but the net benefits to society are positive.

Question 7

What are some benefits of international trade?

Answer 7

Lower prices for consumers
Greater choice for consumer 
The ability of producer to benefit from economics of scale
The ability to acquire needed resources 
A more efficient allocation of resources
Increased competition 
A source of foreign exchange 
Increase market size 
Improved international relations

Question 8

Why is lower prices for consumers a benefit of international trade?

Answer 8

Free trade reduces the cost of trading meaning consumers are better off.

Question 9

Why is greater choice for consumers a benefit of international trade?

Answer 9

Free trade enables consumers and firms to access a larger variety of goods and services from different producers around the world.

Question 10

Why is the ability for producers to benefit from economies of scale a benefit of international trade?

Answer 10

By operating on a larger scale in international markets free trade enables firms to benefit from economies of scale ie. costs savings that can be passed onto consumers in the form of lower prices.

Question 11

Why is the ability to acquire needed resources a benefit of international trade?

Answer 11

Through trade countries can access nature resources and capital goods that are not available domestically to further their production.

Question 12

Why is a more efficient allocation of resources a benefit of international trade?

Answer 12

Free trade benefits the economy as it ezncroages an efficient allocation of the world scarce resources. free trade forces domestic firms to focus on improving the quality of their output due to foreign competition.

Question 13

Why is increased competition a benefit of international trade?

Answer 13

Trade ensures that domestic firms become exposed to competition from foreign firms. Hence domestic firms are forced to come more proficient ie. to produce goods and services at the lowest possible cost.

Question 14

Why is a source of foreign exchange a benefit of international trade?

Answer 14

When countries sell exports firms and governments acquire foreign exchange. This enables them to make payments to other countries for the purchase of foreign goods and services.

Question 15

Why is increase market size a benefit of international trade?

Answer 15

International trade enables firms to earn more revenues and profits.

Question 16

Why is improved international relations a benefit of international trade?

Answer 16

The absence of trade barriers encourages international trade and cooperation between countries. By contrasts if a country uses trade barriers then other countries are likely to retaliated by doing the same.

Question 17

What is comparative advantage?

Answer 17

Exists when a country can produce a given amount of output at a lower opportunity cost than another country ie. it gives up less resources than other countries in producing a certain good or service.

Question 18

What is the theory of comparative?

Answer 18

Countries should specialise in goods and service when they have a comparative advantage, ie. the theory suggests that countries should produce and trade products in which they have a comparatively low opportunity cost even if the trading partner has an absolute advantage in the output of both products.

Question 19

What are the sources of comparative advantage?

Answer 19

Differences in:
Factor endowments
Levels of technology - workers with access to the latest technology will be much more productive than those using outdated technology.
Investment in research and development - this can give countries a comparative advantage in terms of innovations and inventions. Research and development expenditure can also generate new work processes that reduce the relative costs of production.
Inflation - This can damage the comparative cost advantages of a country as higher prices means that forge in buyers are less willing and able to purchase the exports of domestic firms.
Exchange rate fluctuations - these can affect the relative prices of exports and imports. A long term unfavourable change in the exchange rate can cause a reduction in demand from domestic and overseas customers.

Question 20

What is the world trade organisation?

Answer 20

An organisation to promote trade liberalisation to oversee multilateral trade agreements and to resolve trade disputes between member states.

Question 21

What are the objectives of the WTO?

Answer 21

To encourage free international trade. member states are bolded to reduce and remove artificial trade barriers such as subsidies which reduce production costs for domestic firms.
To remove discriminatory treatment in trade relations between member nations except for those in trading blocs that have their own set of agreed rules.
To help provide trade opportunities for economically developing countries in order to enhance their growth and development prospects.

Question 22

What are the six functions of the WTO?

Answer 22

Administering WTO trade agreements - The Two provides a forum for embers to negotiate trade rules and agreements which become binding contracts for governments to keep their trade policies within agree parameters.
Forum for trade negotiations - Members of the WTO are involved in round of negotiations.
Handling trade disputes - The WTO acts as an arbitrator in trade disputes between member states. It acts to settle such disputes in a quick and objective manner.
Monitoring national trade policies - The WTO regularly monitor the national trade policies of its member states through its trade policy review mechanism. This serves to encourage accountability and transparency on trade policies on a multilateral level.
Technical assistance and training for economically developing countries - Trade related technical support and training are provided to help low income countries to better understand WTO obligations and agreements and thus build their capacity to trade.
Cooperation with other international organisation - The WTO collaborates with other organisations to promote economic cooperation and growth such as the world bank.

Question 23

What is trade protection?

Answer 23

The use of barriers to trade to safeguard a country from excessive international trade and foreign competition.

Question 24

What are barriers to trade?

Answer 24

Obstacle to free trade imposed by a government to safeguard national interests by reducing the competitiveness of foreign firms.

Question 25

What are tariffs?

Answer 25

Import taxes, tariffs raise the cost of production to imports thus raising the price of foreign goods in the domestic market and thereby lowering the amount of imported products. A tariff increases costs of production thus shifting the supply curve up forcing the price upwards.

Question 26

What are the effects of tariffs on domestic producers?

Answer 26

Tend to gain as they receive a higher price and sell a larger quantity, the higher price also means that producer surplus increases.

Question 27

What are the effects of tariffs on foreign producers?

Answer 27

Lose out as the tariff reduces their price competitiveness and they are only able to sell a reduced amount.

Question 28

What are the effects of tariffs on consumers?

Answer 28

They lose out as they have to pay a higher price there is a loss in consumer surplus.

Question 29

What are the effects of tariffs on the government?

Answer 29

Gain since they help to raise government revenue.

Question 30

What are the effects of tariffs on society?

Answer 30

Lose out since there is a welfare loss.

Question 31

What are quotas?

Answer 31

Quantitative limites on the sole of a foreign good into a country - limits the quantity imported and so causes an increase int he market price of the foreign good.

Question 32

What are the effects of quotas on domestic producers?

Answer 32

Gain since it enables domestic firms to supply more to the market they are also able to charge a higher price raising their revenue which can have a positive impact on domestic jobs.

Question 33

What are the effects of quotas on foreign producers?

Answer 33

Lose out since imports are reduced so revenue falls.

Question 34

What are the effects of quotas on consumers?

Answer 34

Lose as they are charged a higher price they are only able to buy a lesser amount of the good also.

Question 35

What are the effects of quotas on the government?

Answer 35

There is no direct impact not he government since the quota does not generate any tax revenue.

Question 36

What are the effects of quotas on society?

Answer 36

Reduced consumption resulting from the quota shifts production away from more efficient imported products towards less efficient domestically produced goods. This misallocation of resources results in a net welfare loss.

Question 37

What are subsidies?

Answer 37

A form of financial assistance to local firms to help them compete against foreign imports by lowering the costs of production this helps to protect local jobs.

Question 38

What are production subsidies?

Answer 38

Help to reduce the production costs for domestic firms.

Question 39

What are export subsidies?

Answer 39

Less wide ranging as they are targeted at protecting specific export orientated firms.

Question 40

What are the effects of subsidies on domestic producers?

Answer 40

Gain as they are able to supply more.

Question 41

What are the effects of subsidies on foreign producers?

Answer 41

Lose as it reduces the amount of exports.

Question 42

What are the effects of subsidies on consumers?

Answer 42

Not affected as the price remains at the world price, consumers buy more domestic goods so either they gain or lose depends on the relative quality of the foreign goods.

Question 43

What are the effects of subsidies on the government?

Answer 43

Negative impact on the governments budget due to the expenditure on production subsidies. Taxpayers are also worse odd as there is an opportunity cost of using this money for subsidies.

Question 44

What are administrative barriers?

Answer 44

Bureaucratic rules and regulations that countries use as a form of protection. Complying with these administrative barriers increase the costs for foreign firms.

Question 45

What are embargoes?

Answer 45

Bans on trade with a certain country often due to political and economic disputes although they can be used for health and safety reasons. An embargo rarely benefits local consumers who suffer form a lack of choice and higher prices due to the lack of supply.

Question 46

What are exchange controls?

Answer 46

Restrictions on the quantity of foreign exchange that can be brought or sold by domestic residents thus limiting the amount of foreign exchange available to importerss.

Question 47

What are arguments for trade protection?

Answer 47

Protect domestic jobs
National security 
Safeguard infant industries
Maintain health, safety and environmental standards 
Prevent dumping 
Overcoming balance of payments deficit
Source of government revenue.

Question 48

How does protectionism protect domestic jobs?

Answer 48

Fierce competition form foreign rivals can force domestic firms out of business if there is no trade protection.

Question 49

How does protectionism protect national security?

Answer 49

It safeguards the country from being too reliant on certain imports from other countries. Protection is vital during times of political conflict and war.

Question 50

How does protectionism protect infant industries?

Answer 50

Subsidies help to reduce costs of production, quotas help to limit the degree of rivalry and tariffs help domestic sunrise industries to gain a price advantage.

Question 51

How does protectionism protect health, safety and environmental standards?

Answer 51

Governments may set minimum health, safety and environmental standards for imported products such as medicines and food products to protect its citizens.

Question 52

How does protectionism prevent dumping and other forms of unfair competition?

Answer 52

Dumping occurs when foreign firms sell their products in large quantities at prices deliberately below those charges by domestic firms often below the cost value. The impacts of anti dumping protection include higher domestic consumption caused by lower expenditure on imports, higher sales and profits for domestic firms and improvement in the balance of payments on the current account for the protected country.

Question 53

How does protectionism overcome a balance of payment deficit?

Answer 53

If a country’s expenditure on imports emcees the revenue earned from its exports protectionism measures can be used to rectify their imbalance.

Question 54

How does protectionism raise government revenue?

Answer 54

Tariffs help to raise tax revenue for the government.

Question 55

What are arguments against trade protection?

Answer 55

Misallocation of resources
Danger of retaliation and trade wars
Potential for corruption
Increase costs of production due to lack of consumption
Higher prices for domestic consumers
Increase costs of imported factors of production
Reduced export competitiveness

Question 56

Why does protectionism cause a misallocation of resources?

Answer 56

Government intervention can distort market signals and so lead to a global misallocation of resources protected firms can become too reliant on the government and thus become inefficient.

Question 57

Why does protectionism cause a danger of retaliation and trade wars?

Answer 57

Other countries are likely to react by retaliating and imposing their own trade barriers. Such actions can cause trade wars and trade disputes which ultimately hinder global economic growth and prosperity.

Question 58

Why does protectionism cause a potential for corruption?

Answer 58

Trade restrictions can create opportunities for bribed and illegal smuggling of goods into a country.

Question 59

Why does protectionism cause increased costs of production due to lack of competition?

Answer 59

Protection can create a lack of incentives for domestic firms and industries to control their costs of production.

Question 60

Why does protectionism cause higher prices for domestic consumers?

Answer 60

Protectionist measures can that domestic consumers might not be able to purchase lower priced imports with could be of higher quality than those produced domestically.

Question 61

Why does protectionism cause increased costs of imported factors of production?

Answer 61

Due to trade protection domestic producers might need to pay higher prices for vital imported raw materials and components. This could lead to imported inflation thus leasing to higher domestic prices.

Question 62

Why does protectionism cause reduced export competitiveness?

Answer 62

The lack of foreign competition and incentive to be innovative means that the protection of domestic producers can lead to inefficiencies and hence a decline in the country’s international competitiveness.