Topic 2- Foreign Trade

Question 1

Reasons why international trade takes place

Price

Product differentiation

Answer 1

• some countries can produce goods at relatively lower price than other countries
• may be because of the natural resources available, the skills of the workforce or the q of physical capit
• many traded goods are similar but not identical
• differences in the product mean that some c’s in one country will want to buy a product made in another country even if the same product is domestically produced at the same price

Question 2

Absolute advantage

Comparative advantage

Answer 2

Exists when a country is able to produce a good more cheaply in absolute terms than another country

Exists when a country is able to produce a good at a lowed opportunity cost than another country. Countries will find it mutually advantageous to trade if opportunity cost of production of goods differ.

Question 3

Patterns of trade

Answer 3

• trade is three times the level of that in the early 1990s as a share of global output.
• the UKs trade in manufactured goods have fallen relative to its trade in commercial and financial services
• advanced economies have experienced deindustrialisation with less national output generated by their manufacturing sectors

Question 4

Advantage of free trade

Answer 4

• higher living standards: law of comparative advantage➡️world output⬆️➡️consumers will benefit from higher living standards
• lower prices: consumers will benefit from imported goods which have been produced more efficiently➡️price lower➡️higher consumer surplus
• increased choice: consumers can buy products not available in their country &will benefit from a greater range of a particular product
• economies of scale: firms benefit from eos because there will be a larger market for their products➡️can expand output. Producing larger amount of goods➡️benefit eos➡️fall in LR avg costs➡️higher profits

Question 5

Reasons why international trade takes place

Factor endowments

Answer 5

-differences in factor endowments:
Countries have different factor endowments (factor of production when a good which is worth
A lot is in a country)
E.g Saudi Arabia has a large reserve of oil
Differences in factor endowments lead to trade between countries: Saudia Arabia exports oil and Costa Rico exports bananas

Question 6

Costs of trade for developing countries

Answer 6

• infant industry: New industries are unable to compete
• monopsony power: cannot compete with bigger suppliers
• Primary product dependency: If a developing country is dependent on exporting one product if there is an ilestic demand for that product&fall in price➡️fall in revenue

Question 7

Disadvantages of free trade with explanation

Answer 7

• BOP decifits: deficit on the trade of g&’s balance: uncompetitive g&s➡️Imports will increase relative to exports➡️deterioration in its trade in g&s’s balance
• Dumping: A firm with surpluses of goods might ‘dump’ them on other country(exportin a product in the foreign marker at a lower p than the price in domestic market)➡️undermines local producers➡️bakrupt in Lr➡️country could become dependant on M
• unemployment: dumping and relying on M➡️deficit➡️unemployment
• global monopolies: free trade allows tncs to gain monopoly power. Tncs might exploit consumers by restricting outout➡️higher prices

Question 8

disadvantages of free trade (short version)

Answer 8

• BOP deficits:
• Dumping:
• unemployment
• global monopolies:

Question 9

advantages of free trade (short version)

Answer 9

• higher living standards:
• lower prices:
• increased choice:
• economies of scale:

Question 10

Role of the WTO

Answer 10

• to promote free trade
• to settle trade disputes between member countries
• to increase market share for countries
• to follow a non discrimination policy for all countried

Question 11

Types of trading blocs

Answer 11

Free trade areas
customs unions
common markets
monetary unions

Question 12

Types of trading blocs:

Free trade areas

Answer 12

where trade barriers are removed e.g quotas, tarrifs, general bureaucracy
e.g NAFTA, SAARC

Question 13

Types of trading blocs:

Customs unions

Answer 13

there is free trade between member countries combined with a common external tariff on goods from countries outside the customs union i.e a tax is imposed at an agreed rate on goods imported from non-member countries e,g CACM

Question 14

Types of trading blocs:

common markets

Answer 14

these have the same characteristics as customs unions but include the added dimension of the free movement of factors of production between member countries
e.g OPEC

Question 15

Types of trading blocs:

Monetary/Economic union

Answer 15

These are custom unions which adopt a common currency

Question 16

trading bloc

Answer 16

A group of countries usually within a geographical region that agree to reduce or eliminate trade barriers between themselves