Specialisation And Trade

Question 1

What is international trade?

Answer 1

The exchange of products and services across geographic borders
Trade doesn’t take places between countries it takes place between economic agents of the countries e.g business, consumer and government.

Question 2

What is free trade?

Answer 2

A trade that is free from artificial barriers such as imports tariffs, quotas and other trade barriers.

Question 3

What is the importance of trade for developing countries?

Answer 3

A trade surplus may allow for an improvement in the balance of payments
Increased employment in export industries
Fall in prices for consumers, increases real income

Question 4

What are the risks of trade for developing countries?

Answer 4

Volatile global prices
Increased inequality
Structural unemployment

Question 5

What is absolute advantage?

Answer 5

A country can produce a product using less resources than other nations.

Question 6

What is comparative advantage?

Answer 6

A country has a relatively lower opportunity cost when it decides to specialise in a particular product.

Question 7

What are the assumptions of a comparative advantages?

Answer 7

Constant return to scale
Factor mobility between industries
No import control
Low/no transport costs
Goods are homogenous
Perfect Knowledge