4.1.2 Specialisation and Trade Flashcards
what is an absolute advanatge?
being able to produce more of a good than another country
what is the comparative advantage?
a country has a comparative advatnage in the production of a good if they can produce it at lower opportunity cost than another country
if they have a comparative advanatge then they should do that
how do you calculate comparative advantage in tables?
- calculate ratio of 1 and whoever has lower has the comparative advantage
if a country has comparative advatange in good A then other will have in good B
what is the theory of comparative advantage?
“if countries specialise in the production of the goods in which they have a comparative advantage, global output will increase”
what are the 3 assumptions of the theory of comparative advantage?
- average cost of production is constant
- no trade barriers
- no transport cost
why may the avearge cost of production not be constant?
increased specialisation might result in risng average costs caused by diseconomies of scale
what are the 3 limitation of the tehory of compartive advatnage?
- specialisation may increase average cost of production (diseconomies of scale)
- trade barriers might distort comparative advantage
- transport costs may distort comparative advanatage
what are the advatnages of specialsation and trade?
- the theory of comparative advantage states that specialisation and trade leads to an increasein global ouput which will increase living standards
- allows to sell to international markets, may benefit economies of scale
- lower prices (eocnomies of scale, SRAS) for consumers and more choice
what are the disadvanatges of specialisation and trade?
- the benefits of specialisation and trade is based of unrealsitic asumptions (if increasedproduction costs/ trade barriers/ transport costs then output may not actually increase )
- may lead to overdependance on imports and (exports which means they are not diversified, making them more vunerable)
- may lead to demotivation, decreasse in productivity, increasing prices
what is globalisation?
increased integraion of different economies arounf the world
what are the 5 characteristics of globalisation?
- increased international movement of labour
- increased inetrnational movement of financial capital
- incresed specialsation
- increased international trade
- increased trade to GDP ratios
what is the increased movement of international of labour?
working in a different country to the one yo were born in
- what is FDI?
- what is financial capital?.
financial capital= money
* FDI (foreign direct investment) is where one firm makes an investment into a firm in another country, to gain control over the foreign firm aka an international movement of finacial capital
what is a trdae to GDP ratio?
how high the value international trade is compared to the size of an economy
high ratio= higher depnandancy on international trade to survive
why is specialisation a characteristic of globalisation?
specialisation in the good in which a country has comparative advantage will incresae global output
what are the 4 causes of globalisation?
- improvements in transport
- improvements in IT
- containerisation
- trade liberalisation
how have improvemnets in transport come about ?
availiability and speed of commericial airplanes have helped workers move
how have improvements in IT come about ?
internet means easier to do FDI
what is containerisation?
an efficent and relativley low cost system of transport that uses a common size of steel container to transport goods
790% increase in international trade
what is trade liberisation?
reduction/ removal of trade barriers leading to increased international trade
what is a trade barrier?
a restriction placed by a government/ country on the import of a foreign good. A common example is a tariff
what 6 areas have faced the impact sof globalisation?
- individual countries
- governments
- producers
- consumers
- workers
- the enviroment
what has been the impact of globalisation on individual countries?
- increase in living standards, output increased & GDP,
- overdependance
150 755 of wolrd in extreme poverty- now < 10%
what has been the impact of globalisation on governments?
- increase in tax revenues, as trade to GDP ratios have increased, government collect from tarrifs–> more governmnet spending
- TNC’s can avoid tax through transfer pricing
what is transfer pricing?
a method of pricng goods abd services transferred within TNCs in order to reduce the amount of corporation tax paid
what is the impact of globalisation to producers?
- reduced costs through relocation (relocating production to places with cheaper wages)
- TNCs create higher barriers to entry, smaller fimrs are disadvantaged- cannot benefit from economies of scale
what is the impact of globalisation on conusumers?
- lower prices and higher choice (reduction in production costs coz of economies of scale, increase in SRAS , lower prices )
- (arguably) negative effect on consumer hapiness, more items availiable more consumption, the diderot effect leads to wanting more and a decraese in happiness
wht has been the impact of globalisation for workers?
- increase in job opportuntities due tso improvements in IT and transport
- structural unemployment coz countries specialise if they have a comparative advantage
what is the impact of globalisation on the enviroment?
- increase in global cooperation to fight climate change, since more economic interpendance and relationshios between economies
- increase in global warming (more transport, more manufacturaing)
eg: Kyoto Portocal
what are the advantages of trade liberalisation?
- Trade liberalisation → Increases imports → More capital and machinery required for development → Increases economic development
- Trade liberalisation → Increased specialisation according to comparative advantage → Increases productivity → Increases output → Increases competitiveness → Increases exports → Increases injections → Increases AD → Increases real GDP → Increases economic growth
- Trade liberalisation → Decreases tariffs → Decreases price of imports → Decreased prices for consumers → Increased ability to buy necessities → Increases economic development
- Trade liberalisation → Increases exports → Injection → Multiplier effect → Increases employment → Increases spending → Increases tax revenue → Increases AD → Increases government spending on development → Increases economic growth
