Chapter 2 - Trade

Question 1

Absolute advantage

Answer 1

When a country can produce more of a product than another country

Question 2

Comparative advantage

Answer 2

When a country can produce a product at a lower opportunity cost

Question 3

Limitations of advantages of absolute + comparative

Answer 3

Transport costs
Trade barriers

Question 4

Specialisation

Answer 4

Each country producing only one good

Question 5

Patterns of trade

Answer 5

Composition of a country’s imports and exports and the volume of its trade with the rest of the world
Factors
- Changes in comparative advantages
- Impact of emerging economies
- Trading blocs
- Relative exchange rates

Question 6

Terms of trade

Answer 6

The average prices of exports / the average price of imports x 100
- Measures relative competitiveness
Increase export prices: improvement - improved living standards
Increase import prices: deterioration - fall in living standards

Question 7

Factors of TOT

Answer 7

• Relative inflation rates rise: improvement of TOT
• Exchange rates increase: improvement of TOT
• Raw materials prices imported: deterioration of TOT
• Tariffs: deterioration of TOT
• Primary product dependency: deterioration of TOT

Question 8

Impact of changes in TOT

Answer 8

• Living standards improve if TOT improves
• BOP fall if TOT improves, because export prices will rise, causing relative import prices to rise
• Inflation rises if TOT deteriorates
• Developing countries suffer the “resource curse” - an appreciation in exchange rates of the currencies of these countries and in term increase the terms of trade.

Question 9

WTO

Answer 9

Multilateral organisation which promotes free trade
Advantages
- Low prices
- Greater competitiveness
- Increased economic welfare

Question 10

Trading blocs

Answer 10

FTA: 2/more countries reduce/remove barriers to trade
CU: removal of trade barriers between members and an eternal tariff against non-members
CM: member countries barriers to trade and non tariff barriers are reduced/removed
MU: customs union that also adopt a common currency

Question 11

Advantages of trading blocs

Answer 11

Free trade
Market access and trade creation
EOS
Jobs created
Protection

Question 12

Disadvantages of trading blocs

Answer 12

Retaliation
Distortion of trade
Loss of benefits

Question 13

Reasons for restrictions on Free trade

Answer 13

Protecting domestic and infant industries
Environmental and health concerns
BOP
Anti-dumping measures

Question 14

Types of restrictions on free trade

Answer 14

Tariff - tax on imported goods
Quota - limit number of imports
Subsidies to domestic producers
Non-tariff barriers - health and safety regulations

Question 15

Impact of protectionist policies

Answer 15

Consumers
- Positive: domestic industries might offer better products
- Negative: increased prices for imported goods
Producers
- Positive: domestic industries survive and grow
- Negative: over-reliance can lead to inefficiency
Governments
- Positive: revenue generated
- Negative: strain diplomatic relations - retaliation
Equality: increased income inequality and limit opportunities for developing countries to export
SOL: protect jobs, but consumer choice decreases and prices increase