Theme 4 - International economics Flashcards
What is the difference between absolute advantage or comparative advantage?
An absolute advantage is when a country an produce more of a good using the same resources an a comparative advantage is when a country can produce the goods at a lower opportunity cost
How do we find the comparative advantage of a good numerically?
We divide the quantity of good A by country x by the quantity of good B for country x.
How do we find the comparative advantage of a good grpahically?
The flatter slope has a comparative advantage for the good on the X axis and the steeper slope has a comparative advantage for the good on the Y axis.
What is the theory of Comparative advantage?
A country that specialises in what they have a CA in, world output would increase
Assumptions relating to the theory of comparative advantage
- Average costs remain constant
- There are no tariffs of transportation costs
- No exchange rates
- Lots of competition within the market
- There is always free trade
Limitations relating to the theory of comparative advantage
- Could lead to diseconomies of scale
- Trade barriers may distort the price mechanism
- Real world transportation costs may distort CA
What are the advantages of the theory of CA?
- Increased world output
- Economies of scale
- Lower prices and increased choice for consumer
What are the disadvantages of the theory of CA?
- Unrealistic assumptions
- Demotivation of workers which could increase prices
- Over-dependence of exports and imports makes economies more susceptible to global shocks
Advantages of specialisation and trade
- Increased world output
- Higher quality
- Increases trade which improves the current account
- Development of economies of scale
Disadvantages of specialisation and trade
- Over-dependence on imports and exports
- Over-use of natural resources
- Increased structural employment
What is the difference between static gains and dynamic gain?
Static gains is measuring something in point of time whereas dynamic gains is measuring in the long-term.
What is international trade?
The exchange of goods and services between countries between economic agents in other countries
What are the 4 Patterns of trade?
Comparative advantage, emerging economies, trade blocs and exchange rates
Explain briefly the 4 patterns of trade
CA - Increase exports for a country that specialises in the production of that good
Emerging economies - import and export more to increase real GDP.
Trade blocs - Allow free trade so when tariffs fall, trad increases
ER - Weak ER, increases exports, improving current account
What are terms of trade?
The relationship between the price of exports a d the price of imports
What is the terms of trade formula?
Index of exported prices/index of imported prices X 100
What improves terms of trade?
When exports increase of imports decreases
What deteriorates terms of trade?
When exports decrease or imports increase
What are the 4 factors impacting terms of trade?
- Raw material prices
- Tariffs
- Exchange rates
- Inflation rates
What are the aims of trade blocs?
To remove: Quotas, tariffs, subsidies to domestic products and non-tariff barriers.
What are free trade areas?
These are areas such as NAFTA and the EFTA that don’t have trade barriers therefore free trade is allowed in these areas.
What are customs unions?
These are trade blocs such as the EU and the South Africa customs union which also has removed trade barriers but also have to place a common external tariff on exported goods to non-member countries.
What are common markets?
For example the European single market includes all EU members plus 4 other countries. They are the same as customs unions but they also allow the free movement of factors of production between member countries.
What are monetary unions?
For example the Eurozone contains 19 members of the EU. They all have the same characteristics of a customs union but they all share the same currency so, the Euro. Another monetary union includes the Eastern Caribbean currency union
What is trade creation?
When a tariff is removed, this decreases the price of goods and services. This fall in price means there is a contraction in domestic supply but an increase in domestic demand. This leads to demand for imported goods to increase as excess demand must be met so trade increases.
What is trade diversion?
When a common external tariff is put in place, the price of imports from a non-member country will decrease because it is more expensive than importing from a member country. This means that trade is diverted from low cost producers to high cost producers.
What are the negatives of trade diversion?
Trade member countries have to pay a higher price which may decrease quantity demanded and living standards.
Non-member countries may see a reduction in trade which could lead to a fall in revenue and a worsening in the current account and so, leading to a negative multiplier effect.
What are 3 prime examples of trade barriers implemented by countries?
- Tariffs
- Quotas
- Subsidies to domestic firms
Explain what happens to S and D when a tariff is put in place
When a tariff is put in place, the price increases which increases suppliers incentive to supply but higher prices causes demand to contract. Trade then decreases inwards
What does a,b,c,d stand for ono the demand and supply diagram
A = Producer gain
B + D = Net welfare loss
C = Tax revenue gained
What is a quota?
A physical limit on the number of imported goods
What does the quota diagram show?
When a quota is put in place, domestic supply increases which pushes up the domestic prices causes a contraction in domestic demand.
What is a major drawback of a quota?
No extra tax revenue is gained by the government
Describe what happens when a domestic subsidy is put in place
This causes domestic supply to increase and prices become cheaper which also increases domestic demand however trade decreases and the government will be spending more money
What are non-tariff barriers?
Label regulation, environmental regulation and health and safety
What are 3 main reasons why free trade may be restricted?
- Prevention of dumping
- protecting domestic employment
- protecting infant industries
- Health and safety
What is dumping? How can it be prevented
This is predatory pricing but if a tariff is put in place, this raises the prices of the imported good
Why is protecting domestic employment important?
If a trade barrier is put in place, then production for that good may decrease. This harms people who work at production processes of the goods
What is an infant industry?
An industry that is too small to benefit from economies of scale
Impact of a tariff on consumers, producers, government, living standards and equality
C = High prices, buy from domestic firms P = increase in raw material price, increase COP G = Higher tax revenue gained LS = Can't afford imports so have to pay high domestic price E = Poorer will get poorer from high prices
Impact of a quota on consumers, producers, government, living standards and equality
C = Shortages could increase prices P = Foreign producers can't export as much, domestic benefit G = No extra tax revenue LS = Domestic higher prices may be hard to afford E = rich get richer, poor get poorer
Impact of a subsidies on consumers, producers, government, living standards and equality
C = benefit from low prices domestically P = cheaper cost of production, EOS G = More money spent, expanding industries increases long run growth LS = Increase employment, more competitive E = decease in inequality gap
