4.1 Benefits Of International Trade

Question 1

Benefits of trade

Answer 1

• increased competition
• lower prices
• greater choice
• acquisition of resources
• more foreign exchange earnings
• access to larger markets
• economies of scale
• more efficient resource allocation
• more efficient production

Question 2

What is absolute advantage

Answer 2

Refers to the ability of one country to produce a good using fewer resources then another country

E.x a country has an absolute advantage in a good if with the same quantity of resource it can produce more of the good then another country

Question 3

What is the theory of absolute advantage

Answer 3

I’d countries specialize in and export the good in which they have an absolute advantage the result is increased production and consumption in each country

Question 4

What is comparative advantage

Answer 4

Refers to the situation where one country has a lower opportunity costs in the production of a good than another country

Question 5

What is the theory of comparative advantage

Answer 5

As long as opportunity costs in two countries differ, it is possible for all countries to gain from specialization and trade according to comparative advantage

Question 6

Limitations/unrealistic assumptions of comparative advantage

Answer 6

• FOP assumed to be fixed
• Technology assumed it be fixed
• ignores transportation costs
• there is full employment of all resources
• there is completely free trade

Question 7

What is free trade

Answer 7

Refers to the absence of goverment intervention of any kind in international trade