6.q Reason For International Trade

Question 1

Definition of international trade

Answer 1

The exchange of goods and devices beyond national borders

Question 2

Gains from international trade

Answer 2

1. Lower price
2. Greater choice
3. Difference in resources
4. Economies of scale (international demand)
5. Increase in competition
6. Source of foreign exchange

Question 3

Absolute advantage

Answer 3

The ability of one country to produce more of a good using the same amount of resources

Question 4

Assumption absolute advantage

Answer 4

1. 2 countries with same amount of resources
2. All FOP are fully and efficiently employed
3. FOP are perfectly mobile within each country and perfectly immobile between countries

Question 5

Comparative advantage

Answer 5

A country is deemed to have comparative advantage in the production of a good or service when they can produce that good or service at a lower opportunity cost compared to another country

Question 6

Assumptions for comparative advantage

Answer 6

1. 2 countries with the same amount of resources
2. Opportunity cost stay constant as resources are transferred from one industry to another
3. All factors of production are fully and efficiently employed
4. Factors of production are perfectly mobile within each country but perfectly immobile between countries

Question 7

Real world limitation

Answer 7

1. There is transport cost in international trade
2. Opportunity cost increase as output increase
3. There is no free trade as there is trade barriers
4. Changes in exchange rate
5. Mobility of factors of production