specialisation, comparative advantage / restrictions on free trade / WTO

Question 1

Whats absolute advantage ?

Answer 1

a country has absolute advantage when a country can produce a good using fewer resources

Question 2

what is comparative advantage ?

Answer 2

a country have comparative advantage when a country can produce a good at a lower opportunity cost.

Question 3

whats the theory of comparative advantage ?

Answer 3

theory suggests that countries will specialise in goods and servises in which they have a comparitive advantage. This improves global productivity and world output.

Question 4

how do countries benefit from trade ?

Answer 4

contries trade surplus g/s of which they specialise in improving productivity and world output

Question 5

What are the limitations and evaluations of the thoery of comparitive advantage ?

Answer 5

• it assumes there are only 2 countries and 2 traded goods ( there are many countries and many goods making it very complicated on knowing whos specialising in what)
• it assumes all traded goods are homogeneous ( all goods are different so its hard to make comparisons )
• it ignores transport costs ( which may eliminate the comparative advantage )
• it assumes there are no barriers to trade like tarrifs
• assumes countries are all willing to trade with each other (war may limit this)

Question 6

what is protectionism ?

Answer 6

the use of economic policies like tarrifs and quotas to limit trade between countries to reduce imports.

Question 7

what are the 4 types of restrictions on trade ?

Answer 7

tarrifs , quotas , subsidies and non-tarrif barriers

Question 8

what is a non-tarrif barier?

Answer 8

health and saftey regulations, environmental regulations

Question 9

whats a subsidies ?

Answer 9

a grant given to firms which lowers the price of a good

Question 10

whats a tarrif ?

Answer 10

tarrif is a tax on imports.

Question 11

how do you draw and explain a tarrif diagram ?

Answer 11

supply and demand curve with market equilibrium where they overlap (QE and PE). INELASTIC supply world curve with q1 and q2 and an inelastic supply world +tarrif curve raising the price with q3 and q4. (inelastic because the supply from the rest of the world is massive and ineffected by the UK because its small) The tarrif decreases imports because consumers are less willing to and able to import. The tarrif creates tax revenue shown between the 2 inelastic supplies and between q3 and q4. The tarrif also creates a production deadweight welfare loss between q1 and q3, q2 and q4.

Question 12

whats a quota ?

Answer 12

quota is a physical limit on the quantity of an imported good, no tax is raised.

Question 13

reasons for restrictions on trade

Answer 13

• protect employment and domestic/local businesses - if gov restrict imports this preserves domestic industries because local prices are more competitive than foreign goods
• to reduce unfair competition from countries with cheaper labour, lower production standards or who subsidies production - however missalocation of resourses
• raise tax revenue for gov to reinvest = growth
• to diversify the economy - PPD countries have less income due to tax on imports
  * prevent dumping (the sale of goods less than the cost)
• to improve trade balance and current account HOWEVER it depends on the PED of the goods

Question 14

reasons against trade barries

Answer 14

Firms:
- allows specialisation of goods by comparitive advantage
- technological growth is faster as competition is more competitive
- countries can access larger markets allowing cheaper goods = more profit and sales
Consumers :
- lower prices with better quality due to competition
- greater consumer choice, better welfare
*evaluation - decline of industries due to getting outcompeted and more exploitation of workers, environmental damage *

Question 15

whats the impact of protectionalist policies on consumers

Answer 15

prices rise, less variety/choice, worse quality

Question 16

whats the impact of protectionalist policies on producers

Answer 16

higher prices so higher prifit
.
however some firms suffer from higher costs if they are importers or exporters

Question 17

whats the impact of protectionalist policies on the government

Answer 17

more tax revenue, greater government budget leading to government spending = boosts economic growth by the multiplier effect.
.
However it depends on how big the barrier is, and government spending only leads to growth if it is reinvested.

Question 18

whats the impact of protectionalist policies on living standards

Answer 18

improve because more jobs are provided and businesses are encouraged
.
however people may argue that people would prefer no barries so they can buy more goods and services

Question 19

whats the impact of protectionalist policies on equality

Answer 19

equality gets worse because there are higher prices

Question 20

what does WTO stand for and what do they promote?

Answer 20

world trade organisation who promote free trade (no protectionism)

Question 21

benefits of WTO

Answer 21

-encourages free trade
- lowers prices for consumers
- encourages competitivness
- lead to the law of comparitive advantage , increasing world output
- economies of scale due to specialisation

Question 22

evaluation and disadvantages of WTO

Answer 22

• bad for developing countries who are trying to diversify because countries have already specialised in it
• less tax for government
• exploitation of workers in developing countries
• lead to trade war
• fewer industries due to being outcompeted
• environmental issues
• takes too long