4.1 - AO1 Flashcards
Comparative advantage
When a country has a lower opportunity cost of producing a good or service than another country
Absolute advantage
When a country is able to produce a good or service using fewer factors of production than another country
What are the assumptions of specialisation?
- No transport costs
- Costs are constant (no economies of scale)
- Goods are homogenous
- Factor substitution is easily achieved
- Perfect knowledge
What is the effect of globalization on producers?
- Outsourcing; exploit low skilled workers
- Greater consumer base; from domestic to international
- Diversification; reduced risk of relying solely on a domestic market; different countries have different quantities they demand
What is the effect of globalization on the government?
- Higher taxation but, could lose tax revenue through tax avoidance
- TNC’s have power to bride government, particularly in developing countries as they have a smaller economy
What is the effect of globalization on workers?
- Industries may shut down leaving people redundant but, net employment tends to increase
- Fall in wages; international competition means there is a lot more workers available
Disadvantages of specialization and trade
- Exposure to external shocks; countries become overdependent
- Environmental suffer; output rises, greater resource depletion
- Primary product dependency in developing countries
- Law of comparative advantage is based on unrealistic assumptions
- Structural unemployment; industries close but, net employment will increase; output rises, employment rises
Advantages of specialization and trade
- Higher world output and, therefore, higher living standards
- Lower prices and more choice for consumers; international competition
- Incentivizes domestic producers to be more efficient; larger market and higher competition
Effect of globalization on consumers
- Increase in consumer surplus; perceived value will rise as price fall
- Lower prices
- Greater choice; product differentiation
- Increase in quality; competition increases innovation
What are the types of trading blocs?
- Free trade area
- Custom union
- Common market
- Monetary union
Free trade area
- Free trade area (free movement of goods and services)
- Each member can set their own trade barriers for non-members
Custom union
- Free trade area
- Common trade barriers for non-members
Common market
- Free trade area
- Factors of production flow freely between member countries (e.g. labour)
Monetary unions
- Custom unions that adopt a common currency
- Example: eurozone area of the EU
When will countries specialize?
Countries find specialization mutually advantageous if the opportunity cost is different if not, there is no gain to trade
Factors influencing the pattern of trade
- Trading blocs; free trade areas
- Maintain political relation, reinforcing alliance
- Emerging/developing economies; rich in cheap labor which helps their export sector to grow
- Relative exchange rate e.g. China has kept it’s currency weak to increase their trade surplus
Formula for terms of trade
Index of export prices / Index of import prices x100
Factors influencing a country’s terms of trade
- Relative inflation rates; higher inflation, exports more costly, terms of trade improves
- Relative productivity rates; greater productivity, lower prices, terms of trade deteriorates
- Exchange rates; higher exchange rate, exports more costly, terms of trade improves
Impact of change to terms of trade
