Specialisation, Terms of trade and Patterns of trade (Lesson 2) Flashcards
Define Absolute advantage
When a country can produce more of a good than another with its same resources.
Define Comparative advantage
When a country can produce goods at a lower opportunity cost than another.
Define Opportunity cost
When the cost of the next best alternative is foregone.
Why do countries trade?
- Differences in factors of endowment
- Price differences
- Product differentiation
- Political reasons.
Define Terms of trade
The ratio of export prices to import prices.
Terms of trade equation
(index of export prices/ index of import prices) x 100
What does war do to terms of trade in the short-term?
- Decreases
- More imports of armaments needed
- Production focused on domestic market.
What does lower inflation levels relative to trading partners do to terms of trade in the short term?
- Increases.
What does a drought do to terms of trade in the short-term?
- Decreases.
What does an increase in demand for economies do to terms of trade in the short-term?
- Depends whether we consider the domestic or international market.
What does an increase in domestic currency do to terms of trade in the short-term?
- Decreases.
What does the discovery of a new commodity of a valuable material do to terms of trade in the long-term?
- Increases.
What does a rise in productivity relative to trading partners do to terms of trade in the long-term?
- Increases.
What does an increase in tourism do to terms of trade in the long-term?
- Downwards as people will need to convert their currencies, so there’s pressure on the economy
- Upwards as people are across boarders.
What does changes in terms of trade depend on?
What goods a country is importing and exporting and their relative elasticities.
