Macro 13 - Specialisation and Trade

Question 1

What is the relationship between trade and specialisation?

Answer 1

Trade allows countries to specialise in the production of goods or services that can be produced efficiently

Question 2

What does the choice of specialisation depend on?

Answer 2

The choice of specialisation is often determined by the quality and quantity of the factors of production possessed by a country - its factor endownment

Question 3

What do the UK, China and Germany specialise in respectively?

Answer 3

UK - Financial services
China - Mass low cost manufacturing
Germany - Cars

Question 4

What is the Heckscher Ohlin theory?

Answer 4

The Heckscher Ohlin theory states that a country will export goods that uses its abundant factors of production intensively and will import goods which would have used its scarce factors of production

Question 5

Define the term absolute advantage

Answer 5

A country has an absolute advantage when it can produce more of a product than another country

Question 6

Define the term comparative advantage

Answer 6

When a country can produce a product at a lower opportunity cost than another country so it has a relative advantage in producing that product

Question 7

Explain how to calculate who has comparative advantage between two countries

Answer 7

• Calculate the opportunity costs of each given country in producing each good. To do this think of the figures as a ratio and divide each number to get one side of the ratio as a 1 and the other side is the opportunity cost for making one extra unit of that good
• To identify who has the comparative advantage see who has the lowest opportunity cost of producing a certain good out of all the countries

Question 8

What is the relationship between the gradient of PPFs and comparative advantage?

Answer 8

If PPF gradients are identical then no country has a comparative advantage and opportunity cost ratios are identical. In this case international trade does not have any advantage

Question 9

What are the assumptions underlying the theory of comparative advantage?

Answer 9

• Transport costs are zero
• Factors of production can easily be switched from one product to another
• Perfect knowledge exists
• There are constant returns to scale - there are no economies of scale
• Only two goods/groups of goods are made
• Goods made are identical
• These can all be talked about in evaluations

Question 10

What are the advantages of specialisation and trade?

Answer 10

• Higher living standards
• Higher economic growth
• Larger markets and economies of scale
• Lower prices and more choice for customers

Question 11

What are the disadvantages of specialisation and trade?

Answer 11

• Macroeconomic problems (not achieving the objectives)
• Unbalanced development - International specialisation based on free trade means that only those industries in which the country has a comparative advantage will be developed while the others remain undeveloped
• Problems for developing countries - Developing countries often have a comparative advantage which are vulnerable to price changes and are often bought up by companies with large monopsony power

Question 12

How can you tell which country has a comparative advantage from a PPF?

Answer 12

The country with the gentler PPF gradient has the comparative advantage in the good on the x-axis and the country with the steeper PPF gradient has the comparative advantage in the good on the y-axis

Question 13

Define the term patterns of trade

Answer 13

Patterns of trade are the way in which trade flows occur showing changes in areas of the world exporting and importing certain types of products and changes in trade flows between areas of the world

Question 14

What does a countries’ pattern of trade show?

Answer 14

It shows who the country trades with and what they import and export

Question 15

What are the factors that affect patterns of trade?

Answer 15

• Changes in comparative advantage
• The growth of emerging economies
• Trade blocs
• Changes in relative exchange rates

Question 16

Who is the UK’s largest trading partner overall?

Answer 16

-The EU as a bloc is the UK’s largest trading partner
- In 2019 it accounted for 43% of UK exports of goods and services and 52% of the UK’s imports

Question 17

Which country is the UK’s largest trading partner?

Answer 17

• The US is the UK’s largest trading partner
• The UK exported £121 billion of goods and services to the US in 2019
• This was more than double the value of exports to Germany, the UK’s second largest export market

Question 18

Define the term terms of trade

Answer 18

Terms of trade is the average price of a country’s exports relative to the average price of a country’s imports

Question 19

What is the formula used to calculate terms of trade?

Answer 19

TOT = Index of export prices / Index of import prices * 100

Question 20

What do changes in a country’s terms of trade mean for it?

Answer 20

If a country’s terms of trade rises then it’s better off, if it falls then it’s worse off

Question 21

What are the desirable causes of an increase in a country’s terms of trade?

Answer 21

• More demand for a country’s exports pushing up the price
• Cheaper imports from trading partners

Question 22

What are the non-desirable causes of an increase in a country’s terms of trade?

Answer 22

• High inflation in the UK or lower inflation abroad
• Low rates of productivity
• Tariffs on imported goods
• A stronger currency