LS2 Flashcards
What are the reasons for trade?
Different countries have different factor endowments like the middle east has oil
Some countries can utilise economies of scale and natural resources
Wider choice
What are the advantages of trade?
Allows specialisation so countries can produce what they have a comparative advantage in so resources are used more efficiently
Economies of scale can be exploited
Increased choice from around the world which increases welfare
Increased competition
Skill transfer
What are disadvantages of trade?
Over reliance on countries for exports and imports which can be cut Structural unemployment Transport costs and currency exchange International regulation Market research for foreign markets
What are disadvantages of specialisation?
Competition from foreign firms
Over reliance on 1 industry so have to get imports for others
Trade could be cut
What is absolute advantage?
When output of a profit is greater per unit or resource than other country
What is comparative advantage?
The opportunity cost(benefit of what is given up) of producing a good is lower than that if another country
What are the assumptions of the theory of comparative advantage?
No transport costs No economies or diseconomies of scale Only 2 countries involved FOP are mobile. If a UK steel plant shuts down can the FOP be reutilised? No trade barriers and perfect knowledge
What are the terms of trade?
Both countries benefit
How is comparative advantage shown on a PPF?
Steeper gradient shows comparative advantage in Y axis
Shallow shows X
