International trade

Question 1

Define: absolute advantage

Answer 1

When a country is able to produce a good or service more cheaply in absolute terms than another country.

Question 2

Define: comparative advantage

Answer 2

When a country can produce a good or service at a lower opportunity cost than another.

Question 3

Define: terms of trade

Answer 3

Relative price at which exchange takes place- ratio of export prices to import prices

Question 4

What is the equation for terms of trade?

Answer 4

Average export price/Average import price

Question 5

Why does terms of trade worsen in the long run for developing nations?

Answer 5

Over time, global incomes increase. This increases demand for tertiary sector goods and services without changing demand for primary sector goods by much. Developing economies have a comparative advantage in primary goods as they do not have advanced labour or capital so over time their terms of trade weakens as they will be paying more for their imports.

Question 6

What is the Hecksher-Ohlin model of trade?

Answer 6

It suggests that countries differ in factor endowments and products differ in their factor intensities. Countries should specialise in producing goods and services which intensively uses the factors of production that they are endowed in.

Question 7

What is an MNC?

Answer 7

A multinational corporation: a company that is headquarted in one country but operates within many countries around the world

Question 8

Define: protectionism

Answer 8

Policies to reduce the level of imports into an economy.

Question 9

Why do countries engage in protectionism?

Answer 9

• Protection of infant industries
• Prevention of dumping
• Protection of jobs
• Prevention of negative externalities
• Political reasons/security

Question 10

Explain the negative externalities that may come about from trade

Answer 10

Some products such has food stuffs with a high level of chemicals and toys that don’t meet EU standards are assessed to be too dangerous to import.

Question 11

What is an embargo?

Answer 11

A ban on imports- it is the most aggressive form of protectionism. Most commonly used for products that are judged to be dangerous or ‘dumped’ into the domestic market.

Question 12

What are regulations on imports?

Answer 12

Rules and laws that cover imported products- most commonly safety standards (this increases the costs of production for the firms).

Question 13

What is a VER?

Answer 13

Voluntary export restraints- when two countries agree not to export to each other temporarily.

Question 14

What is bureaucracy and red tape?

Answer 14

Excessive administrative requirements filling out forms, waiting for approval and a license, being transferred from department to department… This increases costs of production for foreign firms and makes things very slow and massively increases the time it takes for exports to be made.

Question 15

What are the benefits of protectionism

Answer 15

• Allows for development of infant industries
• Prevents structural unemployment
• Improves BOP as there are less money leaks from circular flow
• Reduces interdependence, Imported inflation, contagion, recession, and crisis in essential goods during wars

Question 16

What are the disadvantages of protectionism?

Answer 16

• Higher prices for consumers
• Lower levels of consumption and therefore lower material standards of living
• Lower quality and choice of goods and services
• Leads to further protectionism and possibly a trade war.
• May lead to COP rising globally

Question 17

What are the advantages of free trade?

Answer 17

• Lower prices for consumer
• Better choice/high quality of goods
• High levels of consumption=higher material standards of living=better quality of life
• Produced in countries that have the competitive advantage in producing them.
• Use of scarce resources maximised