International trade

Question 1

What does free trade mean?

Answer 1

A situation in which the goods coming into or going out of a country aren’t taxed

Question 2

How does international trade benefit the world?

Answer 2

It helps raise living standards and results in higher levels of output and income

Question 3

Why is international trade done?

Answer 3

• To obtain goods that cannot be produced domestically and also to obtain goods that can be bought more cheaply overseas
• Selling off unwanted commodities as a country might have so much of a resource that they cannot use it all themselves
• Many countries can’t produce certain goods as they lack natural resources that enable production

Question 4

Why can some countries produce goods more efficiently than others?

Answer 4

Possibly due to the countries having cheaper resources such as cheap labour or because they’ve become experts through specialisation and it makes sense to buy goods from other countries if they’re cheaper

Question 5

How do countries encourage free trade?

Answer 5

The governments allow open access to the markets in its country and doesn’t place any restrictions on imports. At the same time, it encourages firms to sell goods and services abroad.

Question 6

What are some advantages of free trade?

Answer 6

• Lower prices for consumers and increased consumer choice as many countries both buy and sell the same products.
• Consumers in the host country will be able to buy goods from materials that aren’t available in the host country
• Consumers in the host countries will be able to buy goods that other countries produce more cheaply meaning their standard of living improves as they will have a greater purchasing power

Question 7

How does international trade allow advantages of specialisation to be extended?

Answer 7

• Specialization allows countries to produce goods and services more efficiently.
• This leads to lower production costs, lower prices, increased consumer demand, and economic growth.
• Specialization also allows for better use of resources and focus on what countries are best at.
• Overall, international trade increases efficiency in resource allocation and production

Question 8

What will it mean for firms if countries are free to trade and free to specialise?

Answer 8

Firms will be selling to larger markets which helps to reduce the risk of a business enterprise becuase if sales in one country start declining, a company can rely on the success of sales in other countries to offset the decline

Question 9

Why would a company want to sell larger quantities to a wider range of markets?

Answer 9

It can exploit economies of scale as their output will be higher than if they were selling to just domestic markets leading to lower costs and improved efficiencies.

Question 10

What are the disadvantages of free trade?

Answer 10

• Competition for domestic businesses means if a country has open economies, imports from anywhere can flow into the economy and if the imports are of good quality and competitively priced, domestic producers may struggle to compete.
• However, not all of the decline in manufacturing countries can be blamed on cheap imports as booming growth in the service sector has to be considered
• When domestic industries are threatened by cheap imports, countries can suffer increases in unemployment rates when demand patterns change.

Question 11

Why do primary goods have low income elasticity when the global economy grows?

Answer 11

Demand for them won’t increase at the same price hence, countries need to avoid overspecialisation and try to diversify their products in some way