Terms Of Trade

Question 1

Terms of trade

Answer 1

Measures the price index of exports divided by the price index of imports

Question 2

Hecksher Ohlin Theory

Answer 2

A country will export goods that use its abundant factors intensively, and import goods that use its scarce factors intensively

Question 3

Improving terms of trade means

Answer 3

That for every unit of exports sold it can buy more units of imported goods

Question 4

Examples of regional trading blocs

Answer 4

EU

NAFTA

Question 5

Factors that determine international competitiveness

Answer 5

More and more countries have opened up heir markets and resources to trading
This has increased the competition between countries so international competitiveness has become a key measure

Question 6

4 factors affecting international trade

Answer 6

Productivity
Unit labour costs
Exchange rates
Product quality

Question 7

Define productivity

Answer 7

Measure of output per unit of input

Makes a country’s exports relatively cheaper

Question 8

What does productivity depend on?

Answer 8

Skills of labour force 
Motivation 
Technology 
Infrastructure 
Buildings and machines

Question 9

Define unit labour costs

Answer 9

Average cost of labour per unit of output produced

Improve productivity or pay restraint

Question 10

Define balance of payments

Answer 10

A record of a country’s transactions with the rest of the world. It shows the receipts from trade and consists of the current and financial account

Question 11

What is a balance of payments current account surplus

Answer 11

If the value of exports is greater

Question 12

What is a balance of payments current account deficit

Answer 12

If the value of imports is greater

Question 13

What is a current account

Answer 13

All payments for trade in goods and services plus income flow

Question 14

4 parts of the current account

Answer 14

Balance of trade in goods
Balance of trade in services
Net income flows-primary income flows
Net current transfers-secondary income flows

Question 15

Primary income

Answer 15

Wages

Question 16

Secondary income

Answer 16

Something for nothing (remittances)

Question 17

Factors affecting balance of payments

Answer 17

Economic growth
Exchange rate
Decline in international competitiveness making countries exports less competitive and imports more attractive

Question 18

international trade

Answer 18

the exchange of goods and services across international borders

Question 19

absolute advantage

Answer 19

this is when a country can produce a good or service using fewer resources and at a lower cost than another country

Question 20

comparative advantage

Answer 20

occurs when a country can produce a good or service at a lower opportunity cost than another country

Question 21

benefits from trade

Answer 21

exports increase national income
stimulate innovation
imports are often goods that cannot be produced in an economy
increased consumer choice

Question 22

define innovation

Answer 22

the process of translating an idea or invention into a good or service that creates value or for which customers will pay

Question 23

assumptions of opportunity cost ratios

Answer 23

only 2 countries
both countries only supply the same 2 things
both allocate 50% of resources to each product

Question 24

importance of comparative advantage

Answer 24

combined output will be higher 
the underpinning principle of international trade 
we specialise in what we're good at
higher volumes of scale can be achieved 
improvements in quality

Question 25

why comparative advantage may change over time

Answer 25

non-renewable resources run out 
investment in R+D
movements in exchange rate 
long term inflation may deviate 
import controls may be imposed

Question 26

weaknesses comparative advantage ignores

Answer 26

cost of trade 
external costs of trade
diseconomies of scale 
assumes perfect information 
assumes perfect factor mobility

Question 27

2 types of economies

Answer 27

emerging

developed

Question 28

factors that determine international competitiveness

Answer 28

productivity
unit labour costs
exchange rates
product quality

Question 29

how does productivity affect competitiveness

Answer 29

it is the measure of output per unit of input
makes a country’s exports relatively cheaper
depends on: skills of labour force, motivation, technology

Question 30

how does unit labour costs affect competitiveness

Answer 30

lower costs increase competitiveness
it is the average cost of labour per unit of output produced
can be improved by improving productivity, or pay restraints

Question 31

how do exchange rates affect competitiveness

Answer 31

changes in exchange rates can alter competitiveness
SPICED, WPIDEC
countries can affect their currency value through interest rates

Question 32

how does product quality affect competitiveness

Answer 32

reflects the skills of the labour force

high quality can charge higher prices but remain competitiveness