Specialisation and Trade

Question 1

What is the effect of international trade on prices and the variety of goods/services?

Answer 1

International trade decreases prices and increases the variety of goods/services available to a nation

Question 2

What is the result of increased international trade?

Answer 2

Higher standard of living

Question 3

Who developed the theory of comparative advantage and in what year?

Answer 3

David Ricardo in 1817

Question 4

What does the theory of comparative advantage state?

Answer 4

A country should specialise in the goods/services that it can produce at the lowest opportunity cost

Question 5

What happens when a country specialises in production according to the theory of comparative advantage?

Answer 5

The volume of production increases

Question 6

What can a country do with excess production?

Answer 6

Export it

Question 7

What is absolute advantage?

Answer 7

When a country is able to produce a product using fewer factors of production than another country

Question 8

Can a country have absolute advantage without having comparative advantage?

Answer 8

Yes

Question 9

What should a country produce according to comparative advantage?

Answer 9

Goods/services in which it has comparative advantage

Question 10

What are the assumptions of comparative advantage?

Answer 10

• Transport costs are zero
• There is perfect knowledge
• Factor substitution is easily achieved
• Constant costs of production

Question 11

What does the production possibility frontier illustrate?

Answer 11

Comparative and absolute advantage

Question 12

What is the opportunity cost of producing 1 computer chip for Country A?

Answer 12

2 t-shirts

Question 13

What is the opportunity cost of producing 1 computer chip for Country B?

Answer 13

1 t-shirt

Question 14

What is the comparative advantage of Country B?

Answer 14

Producing computer chips

Question 15

What is the comparative advantage of Country A?

Answer 15

Producing t-shirts

Question 16

What are some limitations of the theory of comparative advantage?

Answer 16

• Over-dependence
• Environmental damage
• Distribution of income
• Structural unemployment

Question 17

What is a risk associated with over-dependence on international trade?

Answer 17

Vulnerability to geopolitical issues

Question 18

How does comparative advantage affect income distribution?

Answer 18

The distribution of the extra income is likely to be uneven

Question 19

What is structural unemployment?

Answer 19

Unemployment resulting from industry specialization leading to job losses in certain sectors

Question 20

What are some advantages of international specialisation and trade?

Answer 20

• Lower prices
• Greater variety of goods/services
• More competition leads to better quality products
• Economies of scale create efficiencies
• Higher economic growth
• Improved living standards

Question 21

What is a disadvantage of global monopolies?

Answer 21

They can dictate prices and output in many regions

Question 22

What does exposure to external shocks mean in the context of trade?

Answer 22

Shocks to other economies have a knock-on effect due to interdependence

Question 23

What does a deficit on the current account of the balance of payments indicate?

Answer 23

Some countries will import more than they export

Question 24

What is a challenge for developing countries in international trade?

Answer 24

Start-up firms find it harder to compete due to global competition

Question 25

What is over-specialisation in developing economies?

Answer 25

Lack of finance to develop a diversified product base, leading to dependency on commodity prices

Question 26

What cultural impact can increased trade have?

Answer 26

Languages and cultures may blend, impacting indigenous languages and cultures

Question 27

What is the impact of trade on a country’s sovereignty?

Answer 27

Countries may lose some sovereignty as they are influenced by dominant trading partners