The Reasons for International Trade Flashcards
What is Absolute Advantage?
It is caused by Factor Endowment, where one country can produce more goods using less Factors of Production.
What is Factor Endowment?
It is the availability of Land, Capital, Enterprise and Labour.
What is Comparative Advantage?
A country should specialise in the goods or services it can produce at the lowest Opportunity Cost and then trade with another country
What are Opportunity Cost Ratios?
It is the quantity of a product compared to another quantity of a product sacrificed to make it.
What do you use to see Absolute Advantage?
A PPC Graph, using the units of a good to the other good given in the table.
What do you use to see Comparative Advantage?
The Opportunity Cost ratios.
How do you find the suitable exchange rate between countries?
Use the Centre of the Opportunity Cost Diagram when drawn against one.
What are the Terms of Trade?
The Terms of Trade is a measure of the ratio of export prices and import prices. Index of Export Prices/Index of Import Prices x 100.
What is a favourable movement/Improvement?
When the terms of trade index increases.
What is an unfavourable movement?
When the terms of trade index decreases.
What are some limitations of using Comparative Advantage?
- Perfect Knowledge
- Transport Costs
- Import Controls
- Rates of Inflation
- Non-Price Competitiveness
- R&D
- Exchange Rates
What is Free Trade?
When International trade is not barred with tariffs/protectionism methods.
What are some Advantages of Free Trade?
- Greater Efficiency and world resource allocation. (Comparative Advantage)
- Access to goods unable to be produced domestically
- Lower Prices
- Economic Growth
What are some Disadvantages of Free Trade?
- Diseconomies of Scale (Increasing Costs)
- Transportation Costs
