International Economic Issues

Question 1

Define Absolute Advantage

Answer 1

Absolute Advantage is a situation in which given a set of resources, one country can produce more than the other.

Question 2

What is factor endowment

Answer 2

Factor endowment is thee avilability of the factors of production.

Question 3

What is Comparative Advantage?

Answer 3

Comparative Advantage is a situation in which given a set of resources, one country can produce at a lower opportunity costs than the other.

Question 4

What is free trade?

Answer 4

International trade that is not restricted by any protectionism policies designed to protect domestic producers from international competitors.

Question 5

What are the advantages for an economy adopting free trade?

Answer 5

• Efficient allocation of resources; being able to produce products they specialise in producing.
• Competition from international firms can put pressure on domestic firms to keep prices and costs down while raising the quality of their products.
• Firms may increase output to sell to international markets.

Question 6

What is a Trading Possibility Curve

Answer 6

Diagram displaying the effects of a country specialising and trading.

Question 7

What are exports?

Answer 7

Goods & Services sold to other countries.

Question 7

What are Imports?

Answer 7

Goods & Services purchased from other countries.

Question 8

What is the formula for Terms of Trade

Answer 8

Terms of Trade index = (Price of exports/price of imports) x 100

Question 8

What happens if the Terms of Trade index increases?

Answer 8

If the terms of trade index increases this displays a favourable movement meaning that the economy’s ratio of import prices relative to exports is much lower.

Question 8

What happens if the Terms of Trade index decreases?

Answer 8

If the terms of trade index decreases this display an unfavourable movement meaning that the economy’s ratio of imports relative to exports is much higher.

Question 9

Define Terms of Trade

Answer 9

Terms of Trade is the measure of the ratio of export prices relative to import prices.

Question 10

Causes of change in the Terms of Trade.

Answer 10

• The value of the domestic currency relative to foreign currency.
• The changes in demand or supply for a specific good or service.
• The changes in the price level of the good or service.
• Inflationary levels of the economy.

Question 11

Negative effects of favourable movement on the terms of trade

Answer 11

• If exports prices are too low; exploitation of resources may occur resulting in the country having a very scarce amount of resources.
• If the price of exports increases because of a rise in demand, then it is likely to be beneficial as more domestic products will be sold
• However, if the cause is due to an increased cost of production; demand for country’s products will fall and export revenue may decline.

Question 12

Positive effects of unfavourable movement on terms of trade

Answer 12

• May reduce a deficit on the current accounts, if the demand for exports and import is elastic than an unfavourable movement should increase export revenue relative to import expenditure.

Question 13

Limitations of the Comparative and absolute advantage theories.

Answer 13

• Some governments would apply trade restriction
• The exchange rate may not lie between opportunity costs ratios
• High transport costs may offset the comparative advantage.
• Some governments wants to avoid overspecialisation

Question 14

What are some Protectionism Policies?

Answer 14

• Quotas: limits on imports
• Tarrifs: Tax on imports
• Embargoes: A complete ban on a specific type of good/service
• Voluntary export restraints: limit on the number of import from another country
• Exchange control: reduction in purchasing foreign currency’s

Question 15

What is Protectionism

Answer 15

The act of protecting domestic producers from foreign competition

Question 16

Arguments for protectionism.

Answer 16

• Protect domestic producers
• Prevent Dumping
• Improves TOT
• Improves BOP(Balance of Payments)
• Provide protection from cheap labour

Question 17

Arguments against protectionism

Answer 17

• Reduce international competition
• Prevent countries from specialising in products in which they have a comparative advantage
• Reduce the choice of products available to consumers
• Lower the size of firms markets and so reduce their ability to take advantage from economies of scale

Question 18

Define Balance of payments Accounts

Answer 18

Records of a country’s economic transactions with the rest of the world.

Question 19

Define Capital accounts

Answer 19

A record of sales and purchase of patents, copyrights, trademarks; money brought in and out by immigrants.

Question 20

Define Financial Accounts

Answer 20

A record of the transfer of both financial and capital assets between the country and the rest of the world.

Question 20

What are current account imbalances

Answer 20

Debit items within the current account is not equal to the credit items.

• Current Account Deficits: Debit items exceeds the credit items

-Current Account Surplus: Credit Items exceeds the Debit items.

Question 21

Causes of current account deficit?

Answer 21

• Domestic firms import goods in order to increase output resulting in a declining export revenue.
• Declining economic in other countries activity may disincetivise imports entirely or lessen the ammounty of imports.
• Domestic firms are not internationally competitive

Question 22

Define exchange rate

Answer 22

The price of one currency in comparisonw ith another currency.

Question 23

Differentiate between floating and Fixed exchange rate

Answer 23

Floating exchange rate occurs when the exchange rate thaqt is determined by the market forces of the demand and supply.

Fixed exchange rate occurs when an exchange rate remains fixed/does not undergo change regardless of economic/market factors

Question 23

Effects of Fiscal policy on the current Account

Answer 23

If suffering from a deficit, then government could apply contractionary fiscal Policy(Increase tax and reduce government spending)

If Government seeks to reduce current account surplus; they could use expansionary fiscal policy.

For additional info: pls reread chapter 29.2(Fiscal)

Question 24

Effects of Monetary policy on the current Account

Answer 24

To reduce current account surplus, governmkent could also increase consumer expenditure through expansionaqry monetary policy(Raise money supply, lower interest rates); it may try to encourage an appreciation of the exchange rate.

For additional info: pls reread chapter 29.3(Monetary)

Question 25

Effects of Supply side policy on the current Account

Answer 25

Supply side policies may reduce CA deficit by making domestic goods more price competitive and by making the market more attrractive to invest in.

Increased spending on education and training and increased investment subsidies may also increase exports in the long run.