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Economics A level - Jaya > Theme 4 - International economics > Flashcards

Theme 4 - International economics Flashcards

1
Q

What is the difference between absolute advantage or comparative advantage?

A

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

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2
Q

How do we find the comparative advantage of a good numerically?

A

We divide the quantity of good A by country x by the quantity of good B for country x.

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3
Q

How do we find the comparative advantage of a good grpahically?

A

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.

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4
Q

What is the theory of Comparative advantage?

A

A country that specialises in what they have a CA in, world output would increase

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5
Q

Assumptions relating to the theory of comparative advantage

A
  • 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
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6
Q

Limitations relating to the theory of comparative advantage

A
  • Could lead to diseconomies of scale
  • Trade barriers may distort the price mechanism
  • Real world transportation costs may distort CA
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7
Q

What are the advantages of the theory of CA?

A
  • Increased world output
  • Economies of scale
  • Lower prices and increased choice for consumer
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8
Q

What are the disadvantages of the theory of CA?

A
  • Unrealistic assumptions
  • Demotivation of workers which could increase prices
  • Over-dependence of exports and imports makes economies more susceptible to global shocks
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9
Q

Advantages of specialisation and trade

A
  • Increased world output
  • Higher quality
  • Increases trade which improves the current account
  • Development of economies of scale
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10
Q

Disadvantages of specialisation and trade

A
  • Over-dependence on imports and exports
  • Over-use of natural resources
  • Increased structural employment
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11
Q

What is the difference between static gains and dynamic gain?

A

Static gains is measuring something in point of time whereas dynamic gains is measuring in the long-term.

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12
Q

What is international trade?

A

The exchange of goods and services between countries between economic agents in other countries

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13
Q

What are the 4 Patterns of trade?

A

Comparative advantage, emerging economies, trade blocs and exchange rates

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14
Q

Explain briefly the 4 patterns of trade

A

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

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15
Q

What are terms of trade?

A

The relationship between the price of exports a d the price of imports

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16
Q

What is the terms of trade formula?

A

Index of exported prices/index of imported prices X 100

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17
Q

What improves terms of trade?

A

When exports increase of imports decreases

18
Q

What deteriorates terms of trade?

A

When exports decrease or imports increase

19
Q

What are the 4 factors impacting terms of trade?

A
  • Raw material prices
  • Tariffs
  • Exchange rates
  • Inflation rates
20
Q

What are the aims of trade blocs?

A

To remove: Quotas, tariffs, subsidies to domestic products and non-tariff barriers.

21
Q

What are free trade areas?

A

These are areas such as NAFTA and the EFTA that don’t have trade barriers therefore free trade is allowed in these areas.

22
Q

What are customs unions?

A

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.

23
Q

What are common markets?

A

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.

24
Q

What are monetary unions?

A

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

25
Q

What is trade creation?

A

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.

26
Q

What is trade diversion?

A

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.

27
Q

What are the negatives of trade diversion?

A

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.

28
Q

What are 3 prime examples of trade barriers implemented by countries?

A
  • Tariffs
  • Quotas
  • Subsidies to domestic firms
29
Q

Explain what happens to S and D when a tariff is put in place

A

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

30
Q

What does a,b,c,d stand for ono the demand and supply diagram

A

A = Producer gain
B + D = Net welfare loss
C = Tax revenue gained

31
Q

What is a quota?

A

A physical limit on the number of imported goods

32
Q

What does the quota diagram show?

A

When a quota is put in place, domestic supply increases which pushes up the domestic prices causes a contraction in domestic demand.

33
Q

What is a major drawback of a quota?

A

No extra tax revenue is gained by the government

34
Q

Describe what happens when a domestic subsidy is put in place

A

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

35
Q

What are non-tariff barriers?

A

Label regulation, environmental regulation and health and safety

36
Q

What are 3 main reasons why free trade may be restricted?

A
  • Prevention of dumping
  • protecting domestic employment
  • protecting infant industries
  • Health and safety
37
Q

What is dumping? How can it be prevented

A

This is predatory pricing but if a tariff is put in place, this raises the prices of the imported good

38
Q

Why is protecting domestic employment important?

A

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

39
Q

What is an infant industry?

A

An industry that is too small to benefit from economies of scale

40
Q

Impact of a tariff on consumers, producers, government, living standards and equality

A 
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
41
Q

Impact of a quota on consumers, producers, government, living standards and equality

A 
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
42
Q

Impact of a subsidies on consumers, producers, government, living standards and equality

A 
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

Economics A level - Jaya (26 decks)

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