4.1.2, 4.1.3, 4.1.4 - International Trade: Specialisation, Patterns, and Terms of Trade

Question 1

Desribe compartive advantage

Answer 1

Countries find specialisation mutually advantageous by exploiting there own oppurtunity costs.

I.E if India can make 100 cars or 200 bricks and China can make 12 cars or 150 bricks:

• India has absoloute advantage in both.
• But China will produce bricks and India will produce cars as it is more efficient regarding oppurtunity cost and trade.

Question 2

What are the assumption of compartive advantage?

Answer 2

• Assumes there are no transport costs.
• Assumes costs are constant and there are no economies of scale.
• Goods are assumed to be homogenous (Identical) - cant perfectly compare goods from different countries.
• Assumes there are no tariffs or other trade barriers.

Question 3

Advantages of compartive advantage / specialisation

Answer 3

• Shows how world output can be increased.
• Trading and speacialising allows countries to benefit from economies of scale - reduces costs and therefore decreases prices.
• Allows countries to explot there factors of production.
• Trade enables consumers to have greater choice.
• Trade also means there is greater competition.

Question 4

Disadvantages of comparitive advantage / specialisation

Answer 4

• Overdependence on other countries
• Structural unemployment
• Enviroment will suffer
• Loss of sovereignty / Loss of culture

Question 5

What are the core factors influencing the pattern of trade?

Answer 5

• Compartive advantage - E.G manufacturing shifting to developing countries due to lower cost of labour.
• Emerging economies - as countries grow, the are likely to need to import more.
• Trading blocs and bilateral trading agreements.
• Relative exchange rates.

Question 6

What is “terms of trade”

Answer 6

The terms of trade (also known as the real exchange rate) is the real value of countries exports in terms of their imports. The terms of trade index measure the relative prices of a country’s exports and imports.

Question 7

What does an improvement in terms of trade mean?

Answer 7

Favourable - means a country can buy more imports with the same level of exports.

Rise in export prices or fall in import prices = improvement

Question 8

How do you calculate terms of trade?

Answer 8

(average export price index)
—————————————– x100
(average import price index)

Question 9

What are the short run factors influencing a country’s terms of trade?

Answer 9

Exchange rates, Inflation and changes in demand / supply for imports and exports.

Question 10

What are the long run factors influencing a country’s terms of trade?

Answer 10

• Improvemnet in productivity compared to a trading partner
• Changing incomes

In general, anything that affects the price of a country’s imports or exports will affect its terms of trade.

Question 11

What are the impacts of changes of terms of trade?

Answer 11

• Balance of payments could worsen or improve
  (DEPENDS ON PED OF EXPORTS AND IMPORTS)