International Economics Flashcards
Absolute advantage
Can produce a good or service for a lower cost
Comparative advantage
Can produce a good or service for the lowest opportunity cost
Specialisation
Producing a narrow range of goods and services
Limits to trade
Transport cost
Government restriction on trade
Asymmetrical information
Inflexibility of factors of production
Terms of trade
Average index price of exports/Average index price of imports
Benefits from trade
Specialisation leads to economics of scale
Differences in demand
Increased competition
Economic growth from increased demand
Political reasons
Reasons for comparative advantage
Available resources
High demand conditions in home nation drives development
Structure and rivalry of firms
Supporting and ancillary industries
Arguments for restricting trade
Protect infant industries
Protect servile industries
To reduce productive reliance on goods with little dynamic potential
To prevent dumping
To prevent foreign based monopolies
To spread risk of fluctuating markets
To prevent the import of harmful or demerit goods
Strategic trade theory - allowing domestic industries to grow
To exploit market power
To improve balance of payments
Obtain self-sufficiency
Political reasons
Maintain culture
Methods of restricting trade
Quotas
Exchange controls
Import licensing
Embargoes
Administrative barriers
Procurement policies
Dumping
Tariffs
Optimum tariff
Tariff level where the MSC=MSB
Problems with protectionism
Higher prices for consumers
Protection of inefficient industries
Cost of subsidies
Trade retaliation
World multiplier effect
High levels of bureaucracy
Restriction of choice
Corruption
World trade organisation
Non-discrimination - most favoured nation principal
Reciprocity- benefits must be equal
Fair competition - can sanction retaliatory action
Binding tariffs - tariffs have to be negotiated
Trading agreements
Free trade area
Customs union
Common market
Monetary union
Free trade area 1
Members remove tariffs between themselves but set policy with non-members
Customs union 2
Common external area
