International Trade (CH 15)

Question 1

Use of specialisation in production of G/S to trade

Answer 1

• Nations specialise in production of certain goods e.g( Norway is one of the largest oil exporters)
• Nations can exploit their comparative advantage in a good by producing it at a lower opportunity cost
• Absolute Advantage (when a nation can produce more of a good with the same factor inputs)

Question 2

Define Absolute Advantage

Answer 2

When a nation can produce more of a good with the same factors of inputs

Question 3

Benefits of Specialisation in production of G/S to trade

Answer 3

• Greater world output, gain economic welfare
• Lower average cost, as markets become competitive
• Increase supply of goods to choose from
• Outward shift from PPF curve

Question 4

Negatives of Specialisation in production of G/S to trade

Answer 4

• Less developed nations might use non-renewable resources too fast (shortage risk)
• Nations become over-dependent on export of a material such as wheat. (If there’s poor weather conditions, price falls and the economy would suffer)

Question 5

Types of Trading Blocs

Answer 5

• Free trade area
• Custom unions
• Common Markets

Question 6

What’s a free trade area?

Answer 6

Group of nations that trade freely with each other, to redcue or eliminate trade between themselves

Question 7

What’s a custom union?

Answer 7

Nations in a custom union that have established a common trade policy with the rest of the world. Free trade between members

Question 8

What’s a common market?

Answer 8

Established free trade of G/S, a common external tariff and allows free movement of capital and labour across the boarders

Question 9

Benefits of Trading Blocs

Answer 9

• Trade creations (when nations consumes more imports from a low cost producer and fewer high cost producers)
• Reduced transaction costs
• EOS
• Enhanced competition
• Migration ( increased labour supply)

Question 10

Negatives of Trading Blocs

Answer 10

• Migration (good labour employees leave to other nations)
• Trade diversion (when trade shift to a less efficient producer)

Question 11

Explain the trade effect on growth

Answer 11

World GDP increases using free trade; since output increases when nations specialise. Living standards increase and there’s more economic growth

Question 12

Define Invisibles and give an example

Answer 12

• Intangible such as services

e.g Uk + Saudi Arabia dependent on exports or financial services

Question 13

Define Visibles and give an example

Answer 13

• Physical goods (products of manufacturing)

Commonly produced by primary and secondary sectors. e.g Germany + Japan manufacture goods like cars

Question 14

Impact of cheap imports on standards of living

Answer 14

+ Lower consumer prices
Increased:
+Variety and Quality
+ Efficiency
+ Economic growth
- Loss of jobs in domestic industry
- Income inequality
- Quality concerns
- Domestic industry declines