INTERNATIONAL TRADE

Question 1

international trade

Answer 1

the exchange of goods and services beyond national borders

Question 2

free trade

Answer 2

the exchange of goods and services between countries without restrictions

Question 3

what are the 6 benefits of trade

Answer 3

lower price for consumers, increased competition, foreign exchange, greater choice for consumers, economies of scale, efficient allocation of resources

Question 4

greater choice for consumers (benefits of trade) – explain

Answer 4

consumers can purchase goods that are not produced in their country due to increased option of imports

Question 5

increased competition (benefits of trade) – explain

Answer 5

firms are forced to innovate to improve the quality of their products and to more efficiently allocate their resources (high output, low costs)

Question 6

foreign exchange (benefits of trade) – explain

Answer 6

the transfer of ideas and technology becomes faster, meaning innovation in one country benefits others as well

Question 7

lower price for consumers (benefits of trade) – explain

Answer 7

countries are able to specialise at what they produce best, which means that costs tends to be less

Question 8

more efficient allocation of resources (benefits of trade) – explain

Answer 8

allows produce that require raw materials to acquire them easier and at a lower costs, which lowers production costs and increases efficiency

Question 9

economies of scale (benefits of trade) – explain

Answer 9

The market size did producers increases due to foreign buyers which allows them to increase their production

Question 10

Define trade protectionism

Answer 10

Policies that aim at limiting the flow of imports into a country and creating an artificial advantage to exporting firms

Question 11

Explain what a tariff is

Answer 11

A tax on imports aimed at increasing the costs of production for foreign firms,which in turn increases the domestic price so less is imported and consumed

Question 12

Effect on stakeholders tariff (consumers)

Answer 12

Domestic producers pay a higher price and their consumer surplus decreases
Tariff act as a regressive tax
If demand is in inelastic there is a greater burden on consumers

Question 13

Effect of tariff on government

Answer 13

Govt gains revenue from the tariff
AD increases as net exports increases

Question 14

Effect on tariff on domestic producers

Answer 14

They supply a greater quantity at a higher price and therefore earn more revenue
Producer surplus increases
May lead to export inefficiencies due to the decrease in competition on the market

Question 15

Effect of tariff on foreign producers

Answer 15

They supply at a lower quantity
A portion of their revenue is taken due to the tariff

Question 16

Why is a tariff bad

Answer 16

• the decrease in consumer surplus is greater than the increase in producer surplus
• they protect domestic industries that may not have a comparative advantage and make economy less efficient

Question 17

What is a quota

Answer 17

A quantitative restriction on the amount of imports. It aims to limit the supply of imports.

Question 18

Effect of quota on consumers

Answer 18

The price is higher and the quantity is lower and therefore less consumer surplus

Question 19

Effect of quota on government

Answer 19

There is no effect on the government

Question 20

Effect of quota on domestic producers

Answer 20

They can produce more goods at a higher price and therefore earn more revenue and increase their producer surplus

Question 21

Effect of quota on foreign producers

Answer 21

Quantity of goods being imported decreases, less revenue

Question 22

Why is quota ineffective

Answer 22

It results in a deadweight loss due to the misallocation of resources both in domestic and foreign producers

Question 23

What is a subsidy

Answer 23

A government payment to domestic producers which lowers the costs of production and increases their competitiveness resulting in a decrease in imports and increase in exports

Question 24

Define exchange rate

Answer 24

the value of a currency expressed in terms of another currency

Question 25

Define appreciation

Answer 25

the value of a currency increases against another currency

Question 26

Define depreciation

Answer 26

the value of a currency decreases against another currency

Question 27

List the factors that affect the value of a currency

Answer 27

relative interest rates, relative inflation, domestic demand for foreign imports, foreign demand for a country’s exports, speculation, political and economical stability

Question 28

How do relative interest rates affect the value of a currency

Answer 28

higher interest rates attract foreign investments, there is a higher demand – appreciation
lower interest rates offer lenders a lower return, the currency will be sold – depriciation