Specialisaton, Patterns And Terms Of Trade Flashcards
Absolute advantage
If a country can produce a good or service using fewer resources and at a lower cost than another country
Comparative advantage
When a country can produce a good or service at a lower opportunity cost. They have to give up less of another good than another country
Assumptions of comparative advantage
- Two countries and two goods
- Constant opportunity costs
- Fixed resources
- Perfect competition
- Free trade
- Homogeneous goods
Limitations of comparative advantage
- Impractical assumptions
- Ignores economies of scale
- Ignores non-economic factors
- Short-term focus: does not explain short-term fluctuations
- Distributional effects: may benefit a country as a whole, but it may not benefit all individuals or industries within a country equally
Advantages of specialisation and trade
- Efficiency and Productivity: Specialization allows countries to focus on producing what they are most efficient at
- Consumer Benefits: International trade provides consumers with a wider variety of goods and services at competitive prices
- Resource Allocation: It enables efficient resource allocation as countries can allocate resources to industries where they have a comparative advantag
- Economies of Scale: Specialization often leads to larger production scales
- International Cooperation: Trade fosters peaceful international relations
Disadvantages of specialisation and trade
- Job Displacement: Specialization can lead to job displacement in industries where a country does not have a comparative advantage
- Dependency: Over-reliance on imports for critical goods can make a country vulnerable to supply disruptions or price fluctuations
- Income Inequality: While trade can benefit a nation as a whole, it may exacerbate income inequality
- Environmental Concerns: Specialization in resource-intensive industries may lead to environmental degradation
- Trade Imbalances
- Loss of Domestic Control: Relying on imports for essential goods can compromise a nation’s control over its own economy.
Impact of comparative advantage on patterns of trade
- Developing countries have gained a comparative advantages in the production of manufactured goods
- Lead to the deindustrialisation of countries such as the UK
- Production of manufactured goods have shifted
Impact of emerging economies on the pattern of trade
- These countries have often become major exporters of manufactured goods and services
- Uk selling fewer manufactured goods abroad
Growth of trading blocs and bilateral agreements on patterns of trade
- Can impact trade flows. Member countries can enjoy reduced tariffs and trade barriers.
- This can lead to increase trad among them.
Changes in relative exchange rates on patterns of trade
- a depreciation of a country’s currency can make its exports cheaper and more competitive, leading to increased exports
- a stronger currency can reduce exports and increase imports
Terms of trade
Measures the quantity level of exports that need to be sold in order to purchase a given amount of imports
Terms of trade calculation
Terms of trade =weighted average of average export prices/ weighted average import prices x 100
Factors influence in a country’s terms of trade
Short run:
- change in the exchange rate: if a country’s exchange rate appreciates, this will increase the price of its exports - improvement of TOT
- change in the relative rate of inflation: if domestic inflation accelerates relative to its trading partners, its export prices will rise faster than its import prices -> lead to an improvement in TOT -> reduce competitiveness of export
-change in demand and supply for imports and exports e.g. weather
Long run:
- change in relative productivity: faster rate of productivity growth than its trading partners, it is likely to have falling costs, resulting in a worsening terms of trade
- Incomes: Prebisch-singer hypothesis - there will be a long run decline in the TOT for countries that depend in natural resource exports. Natural resources are income inelastic and what they import is elastic e.g. manufactured goods. Import prices are likely to increase much faster -> therefore worsening TOT must diversify
Impact of changes in a country’s terms of trade
- Living standards: an improvement means that a country can buy a greater quantity of imports for any given quantity of exports.
- Balance of payments: If a country’s export prices have risen because of a strong growth in demand from its trading partners, it is likely that export earnings will increase and the current account may improve.
- Inflation: An improvement in the terms of trade because of falling import prices could result in lower inflation
- Growth and employment: – If the terms of trade improve because of growing demand for exports (leading to higher export prices), it is likely that growth and employment levels will be maintained
