macroeconomics - international trade

Question 1

international trade

Answer 1

refers to the exchange of goods and services across national
boundaries.

Question 2

theory of comparative advantage

Answer 2

The theory of comparative advantage states that trade can benefit all countries if they specialise in producing goods and services in which they have a comparative
advantage. A country is said to have a comparative advantage in the production of a good or service if it can produce the good or service at a lower opportunity cost than another country.

Question 3

What assumptions does the theory of comparative advantage make?

Answer 3

• two countries
• same resource endowment between both countries,
• two goods being produced,
• countries divide their resources equally between the two goods before specialisation
• constant returns to scale
• perfect mobility of factors of production
  within the country,
• transport costs are negligible
• free trade between the
  two countries.

Question 4

What are the benefits of specialisation in exports production?

Answer 4

Both countries consume a higher level of output and world output increases as
well. This allows them to consume beyond their production possibility curves
(PPCs). Furthermore, both countries can also benefit from the increased variety of
goods and services. The overall material standard of living improves consequently as quantity and variety of goods and services increases.

Additionally, there are dynamic gains from trade. By increasing competition, trade promotes research and development and helps to drive technological innovations, resulting in improvements in productivity and productive capacity. Furthermore,
free trade also allows for more movement of capital goods and resources which increases the quantity of resources available. This leads to an outward shift of the PPC and improves potential economic growth.

Question 5

Name 3 determinants of comparative advantage

Answer 5

1. quantity & quality of factor endowments
2. differences in technology
3. government policies

Question 6

How do differences in a country’s quantity & quality of factor endowments affect the country’s comparative advantage?

Answer 6

Differences in factor endowment (e.g., labour, capital stock and natural resources) exist among countries. This leads to differences in relative prices of factors between countries and in turn affect the relative opportunity costs of producing goods and services.

Question 7

How do differences in a country’s level of technology affect its comparative advantage?