global economic activity

Question 1

what is absolute advantage

Answer 1

if two countries are each more efficient in making a product then they should focus solely in that product and then trade with the other country

Question 2

what is comparative advantage

Answer 2

this happens when a country has absolute advantage in all products

this theory states that countries should still specialise in the product where they have a comparative advantage (the one with the lowest opportunity cost) world output will rise and living standards in both countries will rise.

Question 3

why do countries have CA or AA

Answer 3

• some countries have suppliers or certain natural resources
• some countries have climate advantages
• some countries have the workers with the skills and knowledge

Question 4

reasons for free trade (5)

Answer 4

• free trade offers consumers more variety in the types of goods and services they purchase
• free trade allows goods to enter a country without trade barriers so the goods are cheaper
• free trade provides competition to domestic business who have to ensure they are efficient and producing high quality goods
• removes the threat of retaliation from other countries
• increases the volume of world trade and the level of world output rises

Question 5

advantages of international trade (7)

Answer 5

• efficient use of world resources as goods are produced where it is most efficient
• specialisation and economies of scale: leads to better quality
• competition is increased with improves efficiency and less change of a monopoly forming
• increased consumer choice
• lower prices for consumers due to increased competition
• closer political links between so greater world peace and less war risk
• increased world output

Question 6

disadvantages of international trade (3)

Answer 6

• over specialisation leads to structural unemployment if demand is reduced
• new industries won’t have a chance to grow because they face competition
• local producers may suffer as cheaper imports may destroy their market

Question 7

what is international trade

Answer 7

it occurs when firms in different countries specialise and trade with one another

Question 8

advantages of barriers to trade (9)

Answer 8

• protecting employment in industries affected by foreign competition
• protecting new industries which aren’t big enough to allow them to compete
• maintain strategic industries e.g. food
• reduce imports to improve balance of payments
• retaliating against countries that protect their industry and markets
• prevent dumping where products are sold in another country at very low prices
• helping the environment e.g. banning products made of rare animals
• protecting consumers from harmful products e.g. drugs
• political reasons to show unhappiness with another country

Question 9

methods of protection (6)

Answer 9

• tariff: a tax on goods coming into the country which increases the price
• quota: physical restriction on the number of goods coming into a country
• embargo: complete ban on trade with a particular country or product
• subsidies: given by governments to domestic business to allow them to compete more strongly by making it cheaper for them to produce
• soft loans: governments may give loans at low rates of interest to foreign buyers
• favouring: governments may choose domestic business when awarding contracts for public sector projects

Question 10

effects of restrictions (5)

Answer 10

• reduced consumer choice
• retaliatory action being taken against a countries exports
• protection reduces competition allowing inefficient to rise
• volume of trade is reduced leading to unemployment in industries
• increased political disagreements