Specialisation And Trade

Question 1

What is the main reason for international trade and the advantages?

Answer 1

Individual countries can not produce everything that their consumers want, so they see he opportunity of imports and exports goods to seek profit.
It allows countries to specialise in producing goods they are efficient in and sell them internationally. Increased employment in firms and opens up markets.

Question 2

Why do countries specialise?

Answer 2

1) to produce goods and services they are efficient in producing.
2) earned revenue helps pay for imports that they can’t produce
3) goods produced are decided by comparative and absolute advantage.

Question 3

Simplifying assumptions

Answer 3

1) Assume a world only has 2 countries that can produce 2 goods each.
2) they have the same amount of land, labour and capital which all cost the same.
3) no tariffs, transports costs is externalities from production or consumption and perfect mobility of factories of production.

Question 4

What is absolute advantage?

Answer 4

Occurs when a country using a fixed amount of factor inputs is able to produce more efficiently than other countries with the same amount of resources.

Question 5

What is the theory of comparative advantage?

Answer 5

• Occurs when a country can produce at a lower opportunity costs than other countries.

Question 6

What is a trading possibility curve?

Answer 6

If two countries agree on a price for a good to be traded at then they can consume outside of their original PPF.

Question 7

What is terms of trade?

Answer 7

• The ratio of export prices to import prices in on country.
• Rise in the price index for exports improves the terms of trade and means a country can import more for any given level of exports.
• can be used to measure a countries competitiveness.

Question 8

What is the formula for terms of trade?

Answer 8

(Index of average export prices / index of average import prices) x100

Question 9

Importance of changes in terms of trade

Answer 9

1) Standard of living: improved terms of trade may mean a country can import cheaper.
2) Prices of imported technology: affects relative price of capital inputs needed to sustain growth. Weaker exchange rate increases the price of imports which worsens terms of trade.
3) balance of payments: value of imports and exports affects the trade balance.

Question 10

Effects of improving the terms of trade

Answer 10

1) fall in the price of imported technology: can use money in other areas to better production but depends on how much technology is used in production.
2) a rise in unit export price of a countries exports: gets more money into the flow of income making the economy better off. Increased AD can increase inflation.

Question 11

Factors influencing terms of trade

Answer 11

1) relative inflation prices: if one country has higher inflation it makes its goods more expensive, reducing competitiveness and worsening trade balance.
2) relative productivity rates : if one country is more efficient in production it will lower costs increasing competitiveness on global market. Demand for its exports will rise improving terms of trade.
3) relative exchange rates: country’s currency may depreciate which makes it exports relatively cheap, improving terms of trade.