4.3.2 Why Trade?

Question 1

What are the different reasons for international trade?

Answer 1

• Different Factor Endowments
• Price
• Product Differentiation
• Political Reasons

Question 2

How is different factor endowments a reason for trade?

Answer 2

Nations will trade factors that they have more of in exchange for factors that they have less of

Question 3

Define Factor Endowments

Answer 3

Factor Endowments are the amount of land, labour, capital and enterprise that a country possesses and can exploit for manufacturing

Question 4

How is price a reason for trade?

Answer 4

Some countries can produce goods cheaper than others (perhaps due to comparative advantage) so people will buy from that country instead of their own

Question 5

How is product differentiation a reason for trade?

Answer 5

Some people will want to buy products from other countries because of differences in the good produced there from a domestically produced good (E.g. german cars are higher quality than american cars)

Question 6

How is political reasons a reason for trade?

Answer 6

Countries will sign trade deals with or impose trade embargos on other countries.

Question 7

What are the main factors affecting patterns of trade?

Answer 7

• The impact of emerging economies like China
• Changes in relative Exchange rates
• Growth of Trading Blocs/Bilateral Trading Agreements
• Comparative and Absolute Advantage
• Abundance of Factors of Production

Question 8

How does emerging economies like China affect patterns of trade?

Answer 8

As economies grow, they import and export more. Countries like China have become some of the biggest global exporters and have disrupted previous trading patterns due to their comparative advantage in producing certain goods

Question 9

How do changes in relative exchange rates affect patterns of trade?

Answer 9

Will make buying goods from certain countries cheaper or more expensive, so more or less will be imported/exported from there

Question 10

How does the growth of trading blocs affect patterns of trade

Answer 10

They increase trade within the bloc/agreement but decrease trade outside the bloc

Question 11

How does comparative advantage/absolute advantage affect patterns of trade?

Answer 11

Countries with comparative advantage will be able to more cheaply produce goods than a country at a comparative disadvantage so they will export to those countries because it is cheaper

Question 12

Define Absolute Advantage

Answer 12

The ability of a country, individual, company or region to produce a good or service at a lower cost per unit than anyone else

Question 13

Define Comparative Advantage

Answer 13

The ability of a country, individual, company or region to produce a good or service at a lower opportunity cost than anyone else

Question 14

Evaluation point for: the effect of Trading Blocs on patterns of trade

Answer 14

Size of trade diversion depends upon size of tariff for trading with non-members. Also depends on the prices for trading in the bloc, if trading outside is significantly cheaper it may not be affected by the tariff

Question 15

Evaluate point for: the effect of factor abundance on patterns of trade

Answer 15

Factor abundance is not static it is dynamically changing all the time, so how they affect patterns will constantly change

Question 16

Evaluate: Changing Exchange Rates effect on patterns of trade

Answer 16

Affected by inflation. High inflation + depreciation means the increase in exports would be mostly cancelled out

Question 17

What is the ‘Terms of Trade’?

Answer 17

The ratio between price of exports and price of imports.

(Index of Exports Price/Index of Import Price) * 100

Question 18

What does it mean for the terms of trade to improve?

Answer 18

the ‘Terms of Trade’ value will increase, meaning export prices are comparatively larger

Question 19

What does it mean for the terms of trade to deteriorate?

Answer 19

The Terms of Trade will decrease, making imports more expensive comparative to exports

Question 20

How do terms of trade affect whether two countries will trade?

Answer 20

Trade will only take place between two countries if the terms of trade lie within the OC ratios of each country

Question 21

What are the arguments for protectionism?

Answer 21

• Infant industry argument
• Job Protection argument
• Dumping Argument
• Cheap Labour Argument
• Terms of Trade Argument

Question 22

Explain the infant industry argument for protectionism

Answer 22

Infant industries have higher costs than foreign competitors so cannot compete without protectionism

Question 23

Explain the job protection argument for protectionism

Answer 23

Protectionist policy preserves jobs by giving more market share to domestic firms (but higher prices and less choice for consumers)

Question 24

Explain the dumping argument for protectionism

Answer 24

Protectionism prevents dumping (selling of excess supply from an another country at an excessively low price) which would otherwise lead to domestic producers being forced out of the market or losing profit

Question 25

Explain the Cheap Labour Argument for protectionism

Answer 25

Countries with high labour costs cannot compete with goods produced by low labour cost countries like China so they need to be protected

Question 26

Explain the counterargument to the cheap labour argument for protectionism?

Answer 26

Will lead to misallocation of resources as consumers are forced to buy high cost domestic, rather than low cost foreign.

Question 27

What are the counter arguments to the infant industry argument for protectionism?

Answer 27

-X inefficiency from lack of competition means they cant compete internationally when the trade barriers are lifted.

Question 28

Disadvantages of protectionism

Answer 28

• Potential Retaliation
• Decline in World Trade outside of blocs
• Inflationary Consequences
• Distortion of comparative advantage

Question 29

How does protectionism have inflationary consequences?

Answer 29

Tariffs on raw materials leads to cost push inflation. Increased demand for domestic goods as substitute for imports leads to demand pull inflation

Question 30

What is the effect of a tariff on consumers?

Answer 30

Higher prices and a lack of consumer surplus. Welfare loss due to spending more than necessary on domestic goods that other countries have a comparative advantage in

Question 31

What is the effect of a tariff on producers?

Answer 31

Higher domestic output

Question 32

What is the effect of a tariff on tax revenue for governments?

Answer 32

Increased tax revenue from imports.

Question 33

What is the effect of a tariff on the balance of trade?

Answer 33

Will increase a balance of trade surplus because imports will decrease and exports will stay the same (ceteris paribus, assuming no retaliation)

Question 34

Evaluation points for the impact of tariffs on an economy

Answer 34

• Depends on trade as percentage of GDP
• Depends on Price Elasticity of Demand for Imports
• Short Term/Long Term for crops

Question 35

Explain the point about how tariffs impact crops in the short term

Answer 35

Short term supply elasticities are very inelastic for agriculture as it takes atleast a season to respond to price change so tariffs may only decrease imports for major crops slightly

Question 36

Explain the point about how tariffs impact crops in the long term

Answer 36

Will have a greater effect in decreasing imports in the long run compared to the short run because domestic producers can respond to the price change

Question 37

Trading Blocs can lead to Trade _____ and Trade _____

Answer 37

Trade Creation and Trade Diversion

Question 38

What is the marker for whether a trading bloc is successful or not?

Answer 38

It is successful if more trade is created than diverted

Question 39

What is the aim of the WTO?

Answer 39

To liberalise trade and create a fairer global economy

Question 40

In what ways have the WTO been successful in achieving their aims?

Answer 40

-Managed substantial reduction in tariffs on manufactured goods

Question 41

In what ways have the WTO been unsuccessful in acheiving thei aims?

Answer 41

• Has been much less successful in reducing barriers to trade in services comparative to goods
• There has been a growth in non-tariff barriers which offset the gains made by reduction in tariffs by the WTO

Question 42

How do trading blocs cause trade creation?

Answer 42

Making it easier and cheaper for members to trade

Question 43

How do trading blocs cause trade diversion?

Answer 43

Making it harder and more expensive to trade outside the bloc, so the trade that would have gone outside the bloc is diverted inside the bloc

Question 44

How are trading blocs damaging to economic development?

Answer 44

LEDCs try export led growth, but it doesn’t work because of tariffs and trade diversion by developed countries. (Can be offset by formation of bloc by LEDCs like the AEC)

Question 45

How can Trading Blocs lead to inflation?

Answer 45

Imports from a low cost country within a bloc means low price, which leads to greater consumption so AD increases within the bloc, causing inflation in the bloc