globalisation and International Trade Flashcards
Why is international trade important?
It allows countries to specialise in the production of goods or services in which they have a comparative advantage and allow countries to benefit by
trading with eachother based on differences in oppurtunity cost.
What is a disadvantage of specialisation?
Once a country specializes in the production of a certain good or service it inevitably allows some sectors to run down, potentially leaving it vulnerable in a crisis e.g. if war comes and they can no longer import this good so they’re left without it.
if a country over -relies on its output of the good it specialises in there is a risk that as technology develops another country will produce a more advanced version of this good, causing the price of the good the country specialises to fall as demand falls.
What is another disadvantage of specialisation?
Once a country specializes in the production of a certain good or service it inevitably allows some sectors to run down, potentially leaving it vulnerable in a crisis e.g. if war comes and they can no longer import this good so they’re left without it.
if a country over -relies on its output of the good it specialises in there is a risk that as technology develops another country will produce a more advanced version of this good, causing the price of the good the country specialises to fall as demand falls.
What is meant by the terms of trade?
The ratio of export prices to import prices.
Essentially it calculates how much the prices of exports are changing in relation to the prices of imports.
How do you calculate the terms of trade?
Average Import Price Index
What does a fall in the terms of trade mean for an economy?
That the same amount of goods being exported will buy a smaller amount of imports than what it would have before.
What does the terms of trade show?
How much exports need to be sold to buy the same amount of imports. This is especially important in developing countries that rely on export revenues to buy impported goods that are not produced in the country.
What is an improvement of the terms of trade?
A larger number in the TOT means that from analysing the basket of export goods , more imported goods can be bought.
Why is looking at only the terms of trade not sufficient in disclosing whether an economy is becoming worse or better off?
The TOT doesn’t measure the amount of imports and exports of a country, and although there may be a fall in the TOT if the volume of trade is increasing quickly this may be balanced out.
It is the income terms of trade that takes into account the volume of imports and exports.
Why do many LDC’s face volatility in the prices of exports? (Explain the instability arising from the demand side of the economy).
The developed countries (that LDC’s export to) demand for commodoties such as minerals is volatile depending on the economic cycle. If it is doing badly and is at a trough, demand is low, so the price of the commodity falls. During an economic boom demand rises and so does the price (supply is relatively inelastic).
Why do many LDC’s face volatility in the prices of exports? (Explain the instability arising from the supply side of the economy).
The LDC’s supply of agricultural goods as exports can be volatile depending on whether there is good harvest or poor, this greatly impacts price expecially since demand for this food is relatively price inelastic.
Why is instability of export prices a serious problem for LDC’s?
Instability of export prices means instability of export reveenues so if an LDC is depending on LDC’s to pay back debt or to fund an investment project the country could be in a serious problem.
What on the demand side of the economy can cause long run deterioration in the terms of trade for countries that rely on primary production?
As incomes of people in developed countries rise, the proportion that they spend on food items tends to fall as they increase their spending on luxury goods, this causes demand to increase only slowly in the long run.
What on the supply side of the economy can cause long run deterioration in the terms of trade for countries that rely on primary production?
Throughout time technology advances allowing
producers to improve the efficiency at which they can turn inputs to outputs, allowing them to produce at a lower cost, increasing supply significantly. The large increase in supply of the agricultural good but small increase in demand shows the deterioration of the terms of trade.
What factors influence the extent to which a country engages in trade?
Whether they have the resources that enables it to produce goods that people want to buy.
Whether the countries policy is open to international trade, or is it protectionist
What do economists Heckscher and Ohlin believe determines what kind of good or service a country is more likely to have a comparative advantage in?
Countries are able to produce different commodities depending on their factors of production e.g.if they have an abundant labour force or capital.
Some commodities are efficiently produced using little capital but a lot of labour and so in such a commodity a country that has abundant labour will find it has a natural comparative advantage.
What is the pattern of comparative advantage?
Following that countries will have a natural comparative advantage in producing certain goods depending on their factors of production it makes sense that LDCs specialise in land or labour intensive activities such as agriculture or other primary production.
While developed countries like the UK specialise in capital intensive activities such as financial services.
Is it always beneficial for a country to follow its pattern of comparative advantage?
A country has to decide whether it is beneficial to exploit its natural comparative advantage.
It is not beneficial for LDC’s as generally, in the long run they face a deterioration in the terms of trade and commodities such as maize face instable prices, causing uncertainty for producers.
