Lesson 2 - International Trade Flashcards
Why is international trade beneficial for both producers and consumers?
Producers = access to more markets
Consumers = more choice
How has the WTO enabled international trade?
Reducing trade barriers
Who created the theory of absolute and comparative advantage?
David Ricardo
What is an absolute advantage?
When a country can produce more of a product than another country, with a given amount of resources
Give an example of absolute advantage
Germany can produce more cars per worker than France, so they have an absolute advantage
What is a comparative advantage?
Country that has the lowest opportunity cost in producing that good (they give up the least)
What is the theory of comparative advantage?
- Countries should specialise and trade the good that they have a comparative advantage in even if they’re better at producing both goods
- then trade with other specialised countries
- increases overall output
What is the terms of trade?
The ratio between average export and import prices
What is the equation for terms of trade?
(Index price of exports / index price of imports) x 100
What is the impact of an improvement in the terms of trade of the balance of payments?
The BoP will deteriorate
- price of exports are higher
- price of imports are lower
- demand falls for exports and rises for imports, so BoP deficit
What are the limitations to the theory of comparative advantage?
- trade barriers
- ignores transport costs (can outweigh the comparative advantage)
- many countries prefer to remain diversified with products
- too many products in the real world to be able to effectively do this
How can specialising in primary products harm your economy in the long run?
- these goods will eventually run out
- prices fluctuate a lot, leaving the country vulnerable
What is dutch disease?
When one sector prospers while other sectors in the economy decline
