Specialisation and Trade

Question 1

What is Factor Endowment

Answer 1

The amount of land, labour, capital and entrepreneurship that a country possesses and can exploit for production

Question 2

Define Mutually

Answer 2

Felt or done by two or more people or groups in the same way

Question 3

Define Product Differentiation

Answer 3

The process of distinguishing a product or service form others, to make it more attractive to a target market

Question 4

Define Copious

Answer 4

Abundant in supply or quantity

Question 5

What type of method does trade provide

Answer 5

A mutually beneficial method to obtain goods and services that are unavailable or in insufficient supply in an economy

Question 6

What are the main reasons countries trade with one another

Answer 6

Different factor endowments
Price
Product differentiation

Question 7

Define specialisation

Answer 7

Occurs when an individual, firm, region or county concentres on the production of a limited range of goods and services

Question 8

What does the UK specialise in

Answer 8

Finance, Law and Pharmaceuticals

Question 9

How are trade and specialisation related

Answer 9

Trade allows countries to specialise in producing the goods and services they can produce efficiently

Question 10

What happens after specialisation through trade

Answer 10

Countries can earn money to import goods and services unavailable in their economy

Question 11

What assumptions does the theory of absolute advantage make

Answer 11

There are two countries in the world who each have an equal amount of resources

Both countries are capable of producing two goods

Question 12

When is a country said to have an absolute advantage

Answer 12

If it can produce more of a good using equal amounts of resources than another country

Question 13

What can we use instead of output to determine absolute and comparative advantage

Answer 13

Labour costs

The country with the most efficient labour has the absolute advantage

Question 14

What is the theory of comparative advantage

Answer 14

Specialisation and trade can be mutually beneficial even if one country has an absolute advantage in producing both goods

Question 15

How to determine whether a country has a comparative advantage

Answer 15

Determine the opportunity cost of producing each good

Question 16

Which country has a comparative advantage out of two countries

Answer 16

The one with the lowest opportunity cost

Question 17

What does the principle of comparative advantage hold

Answer 17

Specialise in the good which they have the lowest relative opportunity cost

Trade with the other country to obtain the good they no longer produce

Question 18

What is reasonable to expect for a country that specialises in a good they have a comparative advantage in

Answer 18

For output to increase over time

Question 19

What doesn’t the theory of comparative advantage say

Answer 19

How the gains from specialisation will be distributed

Question 20

What do we use trading possibility frontiers for

Answer 20

To figure out potential mutually beneficial exchange rates

Question 21

Define Autarky

Answer 21

Economic independence or self sufficiency

Question 22

Define Forgo

Answer 22

To go without something desirable

Question 23

What does a TPF show

Answer 23

Exchange rates which allow mutually beneficial trade to take place

Question 24

What are exchange rates based on in the theory of comparative advantage

Answer 24

The two goods involved

Question 25

When does it make sense to trade with other countries

Answer 25

If the exchange rate is higher

Question 26

Assumptions to the theory of comparative advantage

Answer 26

No transportation costs
There is perfect knowledge
FOP are perfectly mobile
Cost of producing an extra good is a constant
There are no external costs in production
There are no barriers to trade
No significant externalities

Question 27

What is present in most forms of production

Answer 27

Externalities

Question 28

Advantages of Specialisation and Trade

Answer 28

Allows countries to focus on goods and services which they have a comparative advantage - improved productivity - more efficient allocation of resources - GDP rises

Consumers access to a wider range of goods and services - products benefit from improved choice

Trade opens domestic producers up to competition from abroad - pressure to maintain competitive prices, high quality and innovations - Consumers can benefit from lower prices and higher quality

Larger market for firms - chance to expand to a size unattainable in one country - allows economies of scale to be maximised so cost is reduced - firms can undercut rivals and provide lower prices to consumers

Question 29

Define primary product

Answer 29

Goods that are available from cultivating raw materials without a manufacturing process

Question 30

Disadvantages of specialisation of trade

Answer 30

Can lead to an economy ore region depending heavily on a small number of industries

Can leave countries vulnerable to geopolitical change

If a country loses an industry due to a loss of comparative advantage - structural unemployment is likely to follow

For developing countries - strict adherence to the principle of comparative advantage may be a poor long term development strategy- tend to have comparative advantage in primary produce - weak economic growth because value added is usually low - limits their ability to diversify