International trade

Question 1

What is a) autarky and b) trade liberalisation?

Answer 1

a) No trade b)breaking measures of protectionism

Question 2

Why are countries interdependent?

Answer 2

They differ in terms of demand and supply due to labour, land, tech and resources.

Question 3

Define relative price?

Answer 3

How much of one good needs to be given up for one unit of another.

Question 4

What is the pure exchange model? What are the assumptions?

Answer 4

Shows how trade is advantageous. if relative prices differ in countries in absence of trade then both will gain by exchanging commodities at any intermediate price ratio.
Assumes;
- two countries (domestic and foreign)
-ignores the production process
- FOP are immobile
- assumes all income is spent
- fixed stock of consumption goods e.g food and clothing (2 dimensional graph)

Question 5

What is the iso-value/budget line? WHat does the slope convey?

Answer 5

shows the combination of goods that an economy can afford to consume. The slope shows how much of one good needs to be given up for the other.

Question 6

What is the Iso-value formula?

Answer 6

(Quantity of food x Price of food) + (Quantity of clothing x price of clothing) = value derived from consumption bundle

Question 7

What is the slope of the iso-value line formula?

Answer 7

Qf = V/Pf - (Pc/Pf)QC so slope is -Pc/Pf which is the relative price of clothing (how much food needs to be sacrificed to obtain 1 unit of clothing.

Question 8

What is the endowment point?

Answer 8

Optimal amount of foods and clothes given the price of food and clothes. It captures the aggregate preferences of the country.

Question 9

What happens to the iso-value line when relative price changes?

Answer 9

Slope of the line changes but must pass through the endowment point still. If term on horizontal axis gets relatively more expensive then line becomes steeper.

Question 10

In autarky where does the country consume?

Answer 10

At its endowment point where the IC is tangent to the isovaule line at the point where the relative prices = MRS.

Question 11

Explain how free trade is advantageous? (watch recording)

Answer 11

Iso line gets steeper as when trade opens up becomes relatively more expensive. Finding an optimal point above endowment point (IC to the left) derives more utility as consuming to the right of endowment point is advantageous.

Question 12

To the right of endowment point E does this mean the country is better off with or without trade?

Answer 12

Without as can obtain more of good x or y. To the left the consumer would be able to consume more of good x or y at the relative price.

Question 13

When does a country a)import b)export

Answer 13

Imports if the price of a good in another country is relatively cheaper and export if the price of a goof in another country is relatively more expensive.

Question 14

What are the limitations of international trade?

Answer 14

x not beneficial if individuals arent identical (trade can hurt these people)
x domestic producers will have less of the market.

Question 15

Define;
a)absolute advantage
b)comparative advantage

Answer 15

a) ability to produce a good with fewer resources than another country
b)ability to produce a good at a lower opportunity cost than another country.

Question 16

What are the assumptions of comparative advantage?

Answer 16

Two countries
Both capable of producing two goods with their resources
consumers max utility

Question 17

Are gains of trade from coparative advantage or absolute advantage?

Answer 17

Comparative.

Question 18

What is the PPF?

Answer 18

Shows all possible combinations of goods and services that an economy can produce in a period of time with its available resources.

Question 19

What shape is the PPF and why?

Answer 19

Concave as law of increasing opportunity cost

Question 20

What point on the PPF is
a) attainable
b)unattainable
c)inefficient

Answer 20

a) on the PPF curve
b) outside the PPF
c) inside PPF

Question 21

Where does a country in autarky consume on the PPF?

Answer 21

Where the IC curve is tangent to the PPF and iso-value line

Question 22

Explain the foreign export supply and home import demand diagram?

Answer 22

The higher relative price of food in the other country then the lower imports (home import demand downward sloping). If the relative price of food is cheaper in foreign country then will export less (foreign export supply upward sloping - will only export if those in foreign country are more likely to pay more). Equilibirum is where they intersect (how much should trade with other country). To the left of the equilibrium then consumer happier as price is cheaper than home country,

Question 23

Where is equilibrium in autarky?

Answer 23

Domestic demand = Domestic supply

Question 24

When will a country be a net importer or net exporter?

Answer 24

Net importer if dont have comparative advantage and so price in autarky will be higher than world price.
Net exporter if have comparative advantage as price in autarky will be lower than world price.

Question 25

Pros and cons of exporter?

Answer 25

Domestic producers better off,
trade raises economic well being
domestic consumers worse off

Question 26

Pros and cons of importer?

Answer 26

Domestic consumers better off
trade raises economic well being
domestic producers worse off

Question 27

Benefits of international trade?

Answer 27

• Consumers have wider variety of goods
• Producers can EOS from selling to larger market
• Increased competition from abroad decreases the power of some firms - increasing total welfare.
• increased knowledge share and spread of tech
• generates economic growth.

Question 28

Define protectionism?

Answer 28

Creation of barriers to restrict free trade to protect the domestic industry from competition abroad.

Question 29

Types of protectionism?

Answer 29

Tarrifs,
Quoats
Procurement policies (gov favour domestic producers)
Embargo (ban on certain import)
Import licensing (license for quota)
Export subsidies
Adminsitrative barriers (regs to exclude imports)
Dumping (if gov subsidise their exports so can charge lower price than domestic )

Question 30

What do tarrifs do? What happens to welfare?

Answer 30

Raise price of imports above the world price. Consumer surplus falls, producer surplus rises and total welfare falls as a deadweight loss is created.

Question 31

Who benefits from a quota?

Answer 31

Domestic sellers are better off as the quota raises the world price as supply is restricted.
License holders are better off as they make a profit at buying at the world price and selling at the higher domestic price.

Question 32

Arguments for portectionism?

Answer 32

1. Protects domestic jobs (total unemployment may not rise as job losses from imports are offset with job creation from exports)
2. Industry vital to national security should be protected from foreign comp to prevent dependance on imports. (producers may exaggerate this to get protection).
3. Infant industries should be protected to allow them to mature (hard for gov to determine whether benefits of protecting these industries exceed the cost to consumers of restricting imports or if it will be profitable in the long run)
4. Producers in another country may have an unfair advantage due to gov subsidies (this may mean we can import extra cheap products)
5. Protection as Bargaining Chip argument - Uk can threaten to limit imports unless other country lifts their quota (restricting imports will decrease welfare but if dont will lose credibility)