4.1.2, 4.1.3, 4.1.4 - International Trade: Specialisation, Patterns, and Terms of Trade Flashcards
Desribe compartive advantage
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.
What are the assumption of compartive advantage?
- 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.
Advantages of compartive advantage / specialisation
- 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.
Disadvantages of comparitive advantage / specialisation
- Overdependence on other countries
- Structural unemployment
- Enviroment will suffer
- Loss of sovereignty / Loss of culture
What are the core factors influencing the pattern of trade?
- 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.
What is “terms of trade”
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.
What does an improvement in terms of trade mean?
Favourable - means a country can buy more imports with the same level of exports.
Rise in export prices or fall in import prices = improvement
How do you calculate terms of trade?
(average export price index)
—————————————– x100
(average import price index)
What are the short run factors influencing a country’s terms of trade?
Exchange rates, Inflation and changes in demand / supply for imports and exports.
What are the long run factors influencing a country’s terms of trade?
- 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.
What are the positive impacts when terms of trade improve?
- Higher national income → More revenue from exports.
- Greater purchasing power → Can buy more imports with the same exports.
- Improved living standards → Cheaper imports benefit consumers.
- Stronger currency → Can reduce inflation (cheaper imported goods).
What are the negative impacts when terms of trade improves?
- Decline in export competitiveness → High prices may reduce demand.
- Risk of overreliance on one sector (e.g., oil or commodities).
- Dutch disease → Currency appreciation hurts other export industries.
- Economic instability → If TOT rise is temporary (e.g., commodity boom), a crash later can hurt growth.
What are the negative impacts when terms of trade worsens?
- Lower national income → Need to export more for the same imports.
- Higher import costs → Inflation can rise if essential goods become expensive.
- Decline in living standards → Reduced access to foreign goods.
- Economic strain → Government may struggle with trade deficits.
What are the positive impacts when terms of trade worsens?
- More competitive exports→ Lower prices attract more buyers.
- Stronger domestic growth → Domestic industries may expand if imports become expensive and there is more of a market for domestic goods.
