4.1 benefits of trade

Question 1

Free trade

Answer 1

The absence of government intervention of any kind in international trade. Therefore, trade takes place without any barriers between individuals, firms or governments of different countries.

Question 2

Benefits to international trade

Answer 2

• increased competition
  other countries can complete with each other, more competition and higher quality.
• Lower prices
  countries are able to specialise and use economies of scale to decrease their costs of production and sell their products at a lower price
• Greater choice
• Acquisition of resources
  each country has access to specific natural resources. free trades allows countries to sell their resources for production
• Foreign exchange earnings
  financial gains made by currencies exchanging on the global market
• access to larger markets
  domestic companies can be multi-national and gain more consumers
• economies of scale
  larger markets allows firms to gain larger revenue. they can use this to increase efficiency and lower costs
• efficient resource allocation and production
  free trades allows more efficient allocation of resources. this gives firms access to raw materials which ensure low production costs

Question 3

Draw two graphs of free trade with exports and imports

Answer 3

imports
(bought in another country
when you buy overseas. A country should import a good if its domestic price without trade is higher than the world price

exports
(produced in one country, sold in another)
a sountry will exprt a good if its domestic price without trade is lower than the world price

Question 4

Absolute advantage

Answer 4

a country can produce more quantities of a good with equivalent or fewer resources

Question 5

Comparative advantage

Answer 5

A country has a lower opportunity cost in the production of a good than another country.

Countries should specialise in the production of whatever has the lower opportunity cost and therefore more value.

(this helps countries determine what they should trade)

to calculate: (other good/good)

graph: flatter gradient = more comparative advantage on the horixontal axis

Question 6

sources of comparative advantage

Answer 6

some countries have access to resources which production easier

some countries have access to technology that makes them more efficient in the production of certain goods.

better factor endowment

Question 7

strengths and limitations of comparative advantage

Answer 7

theory of comparative advantage depends on unrealistic assumptions
~ assumes factors of production are fixed
~ assumes technology is fixed

Question 8

Theory of absolute advantage

Answer 8

if countries specialise in and export the good in which they have an absolute advantage, the result in increased production and consumption in each country

Question 9

theory of comparative advantage

Answer 9

as long as the opportunity costs in two countries differ, both can gain from specialisation and trade according to their comparative advantage.