International trade and finance (Topic 14)

Question 1

Why do nations trade?

Answer 1

1) The distribution of natural, human, and capital resources among nations is uneven, nation differ in their endowments of economic resources

2) Efficient production of various goods requires different technologies, and not all nations have the same level if technological expertise

3) Products are differentiated as to quality and other attributes, and some people may prefer certain goods imported from abroad rather than similar goods produced domestically

Question 2

Advantages of free trade

Answer 2

1) It allows all countries to specialise in producing commodities in which they have lower opportunity cost

2) It allows for more efficient allocation of resources.

3) It enables people to enjoy more goods compared to a situation where there was protectionism

4) It promotes competition and deters monopoly. The increased competition from foreign firms forces domestic firms to adopt the most cost-efficient techniques.

5) The imposition of trade barriers often leads to trade wars.

Question 3

Trade barriers (1)

Answer 3

Tariffs - A tax imposed by nation and its imports

Why? - Source of revenue to government, by placing a tax on imports, price of imports is raised but the cost of domestically produced goods remains unchanged, hence relatively cheaper

Gainers

Losers