lesson 2: international trade Flashcards
when was the WTO established?
1995
what did the WTO do?
remove trade barriers to encourage more international trade.
removed tariffs
when does a country have an absolute advantage?
when they can produce more of it than another country so are the best, most efficient and produce more per work
when do we have a comparative advantage?
where we give up the least and have a lower opportunity cost
what is the terms of trade?
the rate at which the products are exchanged between economies
what has specialisation done?
increased overall global output
what is the formula for the index of terms of trade?
= index of exports/index of imports
times 100
when does a countries terms of trade improve and when does it deteriorate?
improves: export prices rise relative to import prices
deteriorates: export prices fall relative to import prices
what are the terms of trade effected by?
exchange rates
inflation
changing patterns of demand
levels of productivity
explain levels of productivity in terms of trade
if you are unproductive
higher costs
worse your terms of trade
making them poor
what will the changes in terms of trade impact?
but what does how big the effect it has depend on?
balance of payments
effects size depends on elasticities
what are the limitations to the principle of comparative advantage?
in the real world countries may find it difficult to find where they have a comparative advantage because of the many products
the theory of comparative advantage does not include transport costs which could significantly outweigh the advantage
import restrictions can reduce the benefits of specialisation and trade
countries prefer to stay diversified and not overly specialised for strategic reasons
what are the arguments for international trade?
countries specialise where they have a comparative advantage –> increasing overall output –> living standards rise
competition pushes efficiency –> lower prices and higher quality –> consumers are winners as there is more choice
firms have access to markets –> successful firms can expand and enjoy EOS –> falling costs –> rising profits –> can be reinvested for innovation
arguments against international trade
over specialisation –> vulnerable to supply shocks
the environmental damage
access to new markets –> lead to domestic firms failing –> structural unemployment
PPQ: 8 marker - … examine two ways in which a worsening trade deficit may affect the UKs economy
1) importing> exporting
demand leaking abroad
the data shows…
uk deficit is worsening since leaving EU
if demand is leaking abroad there’s an increase in unemployment
TDO… gov response and if they can borrow to inject; rn budget deficit is at 4%
2) we are living beyond our means
the data shows…
imports are a leakage and to prevent the economy from shrinking the gov neds to borrow to inject
rising national debt
however money may flow into the UK through FDI but post brexit the UK is less attractive
what is a tariff?
tax on imports
what are the two chains of reasonings as to why economists like specialisation?
leads to EOS —> decreases average costs —> increases output
increases productivity —> decreases costs —> increases prices —> increases competitive
what is economic welfare?
quality of living, environment, education, healthcare, birth and death rate
how do tariffs restrict trade?
local firms have an unfair advantage
when will a countries terms of trade improve?
when the currency strengthens
export prices rise and import prices fall
when will a country be more competitive?
the currency weakens
export prices fall and import prices rise
PPQ: what is likely to effect the BOEs QE?
an increase in the rate of inflation
PPQ: what is likely to cause an increase in the LRAS?
increase in relative productivity
