Free Trade Flashcards
Free trade
International trade exempt form artificial barriers such as tariffs, quotas etc
Adam Smiths Absolute Advantage
Countries specialising in G/S they can produce efficiently can lead to a greater output
David Ricardo’s Comparative advantage
Built on Adam Smiths AA but argued when there isn’t an AA a comparative advantage can lead to an increase in output (concerned with OC)
Identical PPFs
No country can have an AA or CA if their PFFs are identical
Assumptions with CA (4)
• Constant returns to scale
• Factor mobility
• No import controls
• No transport costs
Terms of trade equation
Index of average X prices
————————X100
Index of average M prices
Factors affecting terms of trade (3)
• Exchange rate
• Competitiveness of firms
• Relative inflation rates
Gains from trade (7)
• CA
• Increase X
• Access to new technology
• EOS
• Competition
• Use up surplus materials
• Export multiplier effect
Free trade diagram (2)
Q1 to Q2 = Imports
0 to Q1 = Domestic consumption
Free trade diagram (2)
Q1 to Q2 = Imports
0 to Q1 = Domestic consumption
Costs of trade (5)
• Transport costs
• Negative externalities
• Risk of structural UE
• Inequality
• Risk of exogenous shocks
Why trade is important for developing countries (3)
• Injection of demand
• Increased employment
• Falling prices for consumers
Risks of trade for developing countries (4)
• Volatile global markets
• Geo-political uncertainties
• Structural UE
• Natural resource trap
