4.1.2 Specialisation And Trade

Question 1

What is international trade

Answer 1

The exchange of goods and services between countries

Question 2

Benefits of international trade (macro)

Answer 2

-exports - injection into the circular flow
-imports - help increase consumer welfare - keep down demand-pull inflation
-reduce cost-push inflation - via low import costs
-employment - from demand for exports

Question 3

What is absolute advantage

Answer 3

When one country is able to produce a good more efficiently than another country

Question 4

What is comparative advantage

Answer 4

When one country is able to produce a good at a lower opportunity cost than another country

Question 5

What are some limitations of comparative advantage

Answer 5

-not perfect factor mobility - it may not be easily possible to shift from production of one good to another
-transport costs - transport costs can sometimes eliminate any comparative cost advantages
-more than two countries produce the goods - hard to find where the comparative advantage lies
-not always free trade between countries - tariffs, restrictions and quotas exist
-costs are not constant

Question 6

What are some macroeconomic gains from trade

Answer 6

Imports - can satisfy excess consumer demand which could reduce demand pull inflation
- cheap imports can reduce cost push inflation

Exports - injection into the circular flow of income
- demand for exports increases demand for workers to unemployment falls