global economy 4.1- benefits of international trade

Question 1

state the 9 benefits of international trade

in lavinia’s great american memories every moment must appear

Answer 1

• increased competition
• lower prices
• greater choice
• acquisition of resources
• more foreign exchange earnings
• economies of scale
• more efficient resource allocation
• more efficient production
• access to larger markets

Question 2

increased competition

Answer 2

• domestic firms compete with foreign firms
• leads to greater efficiency
• consumers gain by being offered less expensive goods and services of better quality and variety

Question 3

effect on consumers and producers

lower prices

Answer 3

• free trade ensures the ability to buy goods and services at a lower price than the domestic one
• consumers able to buy less expensive products
• producers able to purchase less expensive raw materials and semi-manufactured goods

Question 4

greater choice

Answer 4

• consumers have a greater choice of products
• not just domestically produced products, but also products that come from a number of different countries

Question 5

acquisition of resources

use singapore as an example

Answer 5

• different countries possess different resources
• there are some resources that a country may need, but simply does not have
• they must import the commodities they lack

eg. Singapore has very few natural resources so has to import almost every natural resource, even water. However, it is able to export high levels of manufactured goods and services to fund its imports.

Question 6

more foreign exchange earnings

Answer 6

• if a country exports products, then that country will be paid in foreign currencies
• this can be used to purchase goods and services from other countries
• especially important for countries that do not have a convertible currency, eg Ghana

Question 7

more efficient production leading to economies of scale

Answer 7

• when producing for an international market as well as a domestic one, the size of the market, and thus demand, increases
• level of production and size of production units also increases
• specialisation and division of labour increase within companies
• this makes producers more competitive, and reduces long run average costs

economies of scale refers to the cost advantages reaped by companies when production becomes efficient

Question 8

more efficient allocation of resources

Answer 8

• countries that are best at producing certain goods and services will produce them at the lowest cost and highest efficiency
• world’s resources are being used most efficiently

Question 9

what is a convertible currency?

Answer 9

one which can be freely exchanged for other currencies on the world market

Question 10

define International trade

Answer 10

the exchange of good and services between countries

Question 11

define free trade

Answer 11

when goods and services are allowed to move freely between countries.

takes place when there are no barriers to trade put in place by governments or international organisations.

Question 12

draw and label the diagram:
free trade illustrating exports when the world price is above domestic price

Answer 12

elsewhere

Question 13

draw and label the diagram:
free trade illustrating imports when the world price is below domestic price

Answer 13

elsewhere

Question 14

define welfare

Answer 14

the combined consumer and producer surpluses
Social/total welfare = CS + PS

Question 15

define deadweight welfare loss

Answer 15

welfare that is lost to society as a whole as a result of enabling less efficient domestic firms to participate in the market