specialisation and trade + pattern of trade Flashcards
what is the definition of comparative advantage?
a country should specialise in the goods and services it can produce at the lowest opportunity cost relative to another nation
what is the definition of absolute advantage
when a country can produce a product with fewer factors of production than another nation
where a country using a given resource input is able to produce more than other countries with the same resource input
so can make a good more cheaply
each country specialises in the production of that good
how do you calculate opportunity cost?
to calculate opportunity cost: put the quantity of the good asked about in the question as the denominator
e.g if asked to calculate opportunity cost of making bread instead of beer - put the quantity of bread that country makes as the denominator
how can trade mutually beneficial?
there needs to be suitable rate of exchange
draw opportunity cost ratio diagram- plot what the country couldve produced instead of that good
rate of exchange must lie between opportunity cost ratios
both must benefit -> produce at a level where ther cmbined production of both goods is greater without specialisation
when is it worth selling to a country?
if what they get back in return is more than what they couldve made themselves with what they would lose to make that good
what does it mean when the point is outside the PPF?
unattainable but by specialising it is attainable producing a new PPF curve meaning it can consume beyond its PPF
what does comparative adv assume?
- only two types of products
- the two goods are the same
- only two countries in the world
- theres perfect info
-no transport costs
-no economies of scale- countries could exploit economies of scale more than the country with the comparative adv - ignored rates of inflation- if inflation is high erodes comp adv
- no import controls- there could be tariffs
- non price competitiveness ignored- reliability, brand loyalty, innovation may dominate
- exchange rate movement ignored
- RoD (research and developement) investment ignored- final product produced is slightly different
what are the advantages of specialisation of trade
o Greater world output, so there is a gain in economic welfare.
o There could potentially be higher quality, since production focuses on what people and businesses are best at.
o A greater variety of goods and services could be produced.
o Lower average costs, since the market becomes more competitive.
o There is an outward shift in the PPF curve.
o More opportunities for economies of scale
what are the disadvantages of specialisation of trade
Less developed countries might use up their non-renewable resources too
quickly, so they might run out.
o Countries could become over-dependent on the export of one commodity,
such as wheat. If there are poor weather conditions, or the price falls, then
the economy would suffer.
o There could be more structural unemployment, since production moves
abroad.
o Some countries might become stuck in the production of one good or service,
so they cannot develop further
recall the factors that influence trade?
comparative advantage
impact of emerging economies
growth of trading blocs and bilateral trade agreements
why has there been a recent growth in the exports of manufactured goods from developing to developed countries?
developing countries have gained an advantage in the production of manufactured goods
due to their lower labour costs, so production shifted abroad
what is the effect of deindustrialisation?
The deindustrialisation of countries such as the UK has meant the manufacturing sector has declined.
- production of manufactured goods has shifted to other countries, such as China, whilst the UK now focuses more on services, such as finance
- could lead to job losses/unemployment due to production moving abroad
- decreased consumption
what is the impact of emerging economies?
The collapse of communism has meant that more countries, especially developing countries, are participating in world trade
International trade is arguably more important for developing countries than developed countries. It contributes towards 20% of LDC economies compared to 8% of the US economy
what is the impact of growth of trading blocs and bilateral trading agreements?
With more trading blocs, trade has been created between members, but diverted from elsewhere
what is internatonal trade
the exchange of goods and services across national frontiers/ between countries
