Chapter 4 - Trade, Protectionism And Globalisation

Question 1

Comparative Advantage

Answer 1

One country has a comparative advantage over another in the production of a good if it can produce at a lower opportunity cost

Question 2

Assumptions of comparative advantage?

Answer 2

Constant returns of scale: an increase in production leads to an exactly proportionate increase in output.
No transport cost or barriers to international trade.
Perfect mobility of all factors of production.
Externalities are ignored.

Question 3

Absolute advantage?

Answer 3

A country is said to have an absolute advantage in its production if it can produce more of a product than another country.

Question 4

Terms of trade?

Answer 4

Measures the average price of a country’s exports relative to the average price of its imports.

Question 5

terms of trade formula?

Answer 5

Index of exports price
—————————— X 100
Index of import price

Question 6

What makes trade beneficial (terms of trade)?

Answer 6

Terms of trade must lie between the opportunity cost ratios.

Question 7

Criticisms to comparative advantage?

Answer 7

Free trade not necessarily free trade, rich countries may use their monopsony power to reduce prices

Law of comparative advantage is based on unrealistic assumptions

Question 8

Heckscher-Ohlin Model?

Answer 8

Goes further on comparative advantage. Suggest countries will specialise in the production and export of goods which use resources that are abundant in supply

Question 9

Advantages of free trade?

Answer 9

Higher living standards.
Lower prices.
Increased choice.
Economies of scale.

Question 10

Role of the WTO?

Answer 10

To promote free trade.
To settle disputes between member countries.
Russia joined in 2012. Now 188 countries.

Question 11

Disadvantages of free trade?

Answer 11

A deficit on the TRADE IN GOODS AND SERVICES BALANCE if a countries goods are uncompetitive.
Danger of dumping.
Increased unemployment in some countries.
Increased risk of disruption if the economy suffers, like in 2008
Unbalanced development: only countries that have a comparative advantage will be developed. Leading to sectoral imbalances.
Global monopolies (TNCs)

Question 12

What is dumping?

Answer 12

When a goods is sold at less than the cost of among it to a foreign country. Illegal under the rules of the WTO.

Question 13

Sectoral imbalance?

Answer 13

Refers to the imbalance of the three main sectors of the economy

Question 14

Why might developing countries suffer from free trade?

Answer 14

Infant industries unable to compete.
Monopsony power of firms in developed countries might force developing countries to lower their prices.
Countries dependent on primary products might experience declining terms of trade

Question 15

Types of trade barriers?

Answer 15

Tariffs and customs duties - taxes placed on imports.
Quotas - limits on quantity
Subsidies to domestic producers
Administrative legislation -as the WTO and GATT have reduced tariffs other restrictions are used.

Question 16

What administrative regulations can be implemented?

Answer 16

Health and safety regulations
Environmental regulations
Labelling of products
Bureaucracy 
All raise import prices and deter importers.

Question 17

Disadvantages to protectionism?

Answer 17

May cause retaliation.
Inefficiency as domestic firms face less competition.
Distorts comparative advantage meaning specialisation reduced and lower output.
Consumer welfare reduced

Question 18

Trading bloc?

Answer 18

Groups of counties that agree to reduce or eliminate trade barriers between countries.

Question 19

Name 5 trading blocs

Answer 19

European Union (EU)
North American Free Trade Agreement (NAFTA)
Common Market of South America (MERCOSUR)
Central American Foreign Market (CAFM)
Association of Southeast Asian Markets (ASEAN)

Question 20

What are the 4 types of trading blocs?

Answer 20

Free trade area
Custom unions
Common markets
Monetary unions

Question 21

What is a free trade area?

Answer 21

A trading bloc where trade barriers are removed between member countries but countries can maintain restrictions on non member countries

Question 22

What is a customs union?

Answer 22

Free trade between member countries combined with a common external tariff on goods outside the customs union.

Question 23

What are common markets?

Answer 23

Have the same characteristics as customs unions but include another dimension of free movement of factors of production between member countries. Labour tends to be the most obvious and mobile

Question 24

What are monetary unions?

Answer 24

Customs unions which adopt a common currency

Question 25

Why has trade increased by three times what it was in the early 90’s?

Answer 25

Growth of global supply chains.
Increased importance in Emerging Economies.
Fragmentation of production processes along vertical trading chains spread across many countries.

Question 26

Why do can trading blocs be seen as conflicting with the aims of the WTO?

Answer 26

Although they promote free trade, they prevent trade among non member countries.

Question 27

What is globalisation?

Answer 27

The economic integration between countries.

Question 28

Why has globalisation occurred?

Answer 28

Increased trade as a proportion of GDP (from 1960 to now trade has increased as a proportion of GDP from 25% to 57%).
Increased FDI, meaning many manufacturing plants move to developing countries.
Increased capital flows between countries.
Increased movement of labour between countries.

Question 29

Causes of Globalisation?

Answer 29

Decrease in the cost of transport.
Decrease in cost of communication.
Reduction in world trade barriers.
Opening up of China and collapse of communism.
Growth of trading blocs
Increased importance of transnational companies: Increased FDI from TNCs Cheaper production, known as Offshoring.

Question 30

What are capital flows?

Answer 30

Capital flows refer to all money moving between countries as a consequence of investment flows into and out of countries around the world.

Question 31

What are hot money flows?

Answer 31

Capital flows going into and out of countries that is following interest rates or expected increases in the exchange rate.

Question 32

Benefits of globalisation?

Answer 32

Higher living standards.
Economies of scale.
Lower prices.
Increased consumer choice.
Increased tax revenues.
Reduction of absolute poverty in developing countries- due to increased GDP.
Technological transfer
new managerial techniques

Question 33

Costs of globalisation?

Answer 33

Negative externalities resulting from increased production and trade. e.g. environment.
Over-dependance on imports.
Risk of contagion is increased susceptibleness to economic crises)
Increases Inequality.
Exploitation of labour (TNCs)
Exploitation of resources.
Tax avoidance. (Use of transfer pricing)

Question 34

Why can globalisation lead to increased inequality?

Answer 34

The demand for more skilled workers in developed countries resulting in an increase in the earnings gap between the highest and lowest payed workers.

Question 35

What is transfer pricing?

Answer 35

Refers to the price that has been declared by one part of a company for products and services it provides to another part of the same company. Enables TNCs to declare profits in the country in which corporation tax is the lowest.