Macro 13 - Specialisation and Trade Flashcards
What is the relationship between trade and specialisation?
Trade allows countries to specialise in the production of goods or services that can be produced efficiently
What does the choice of specialisation depend on?
The choice of specialisation is often determined by the quality and quantity of the factors of production possessed by a country - its factor endownment
What do the UK, China and Germany specialise in respectively?
UK - Financial services
China - Mass low cost manufacturing
Germany - Cars
What is the Heckscher Ohlin theory?
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
Define the term absolute advantage
A country has an absolute advantage when it can produce more of a product than another country
Define the term comparative advantage
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
Explain how to calculate who has comparative advantage between two countries
- 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
What is the relationship between the gradient of PPFs and comparative advantage?
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
What are the assumptions underlying the theory of comparative advantage?
- 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
What are the advantages of specialisation and trade?
- Higher living standards
- Higher economic growth
- Larger markets and economies of scale
- Lower prices and more choice for customers
What are the disadvantages of specialisation and trade?
- 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
How can you tell which country has a comparative advantage from a PPF?
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
Define the term patterns of trade
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
What does a countries’ pattern of trade show?
It shows who the country trades with and what they import and export
What are the factors that affect patterns of trade?
- Changes in comparative advantage
- The growth of emerging economies
- Trade blocs
- Changes in relative exchange rates
Who is the UK’s largest trading partner overall?
-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
Which country is the UK’s largest trading partner?
- 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
Define the term terms of trade
Terms of trade is the average price of a country’s exports relative to the average price of a country’s imports
What is the formula used to calculate terms of trade?
TOT = Index of export prices / Index of import prices * 100
What do changes in a country’s terms of trade mean for it?
If a country’s terms of trade rises then it’s better off, if it falls then it’s worse off
What are the desirable causes of an increase in a country’s terms of trade?
- More demand for a country’s exports pushing up the price
- Cheaper imports from trading partners
What are the non-desirable causes of an increase in a country’s terms of trade?
- High inflation in the UK or lower inflation abroad
- Low rates of productivity
- Tariffs on imported goods
- A stronger currency
