Trade Flashcards
What is free trade?
Free trade is unrestricted international trade meaning that no protectionism measures are put in place such as tariffs or quotas.
What are the benefits of free trade?
Increased choice for consumers-The ability to import more allows this
Increase competition-Incentive for domestic producers to produce efficiently leading to low prices and high quality.
Economies of scale-Increased scale of production due to larger market size leading to lower costs.
Greater availability of resources-Resources that cannot be acquired domestically can be imported from abroad leading to a larger product range.
Increased flow of technology-Greater spread of technology and trading ideas.
Economic growth-All countries consume more products as these products are being produced where the costs are the lowest. Therefore this leads to economic growth in trading countries.
Disadvantages of free trade?
Overspecialisiation may occur leading an economy vulnerable to changes in patterns of demand and prices.
Countries can become dependant on the imports of certain items/trading partners. If these items are essential, trade wars can affect the economy badly.
The potential outflow of the factors of production-Increased free movement of factors may lead to factors going from low income to high-income economies.
Infant industries may struggle in lower-income countries as they will be competing against established foreign firms.
When is a country considered dependant on a commodity?
When exports of that commodity make up more than 60% of the total export revenue.
What is absolute advantage?
This is where a country can produce a good or service at a lower average cost than another country. Which country can produce the good using fewer resources?Using all of its resources which country can produce the most of that good?
What is the theory of absolute advantage?
It says that both trading partners will benefit from specialising in the production and trade of the goods it has an absolute advantage in.
What is comparative advantage?
This is where a country can produce a good or service at a lower relative opportunity cost compared to another country.A country may not have an absolute advantage in producing a good but it can still have a comparative advantage in producing that good.
What is the theory of comparative advantage?
This theory states that countries can benefit from specialising in the production and trade of goods that it is has a comparative advantage in.
Why does comparative advantage exist?
Due to differences in labour productivity-Costs of production
Differences in factor endowment-If a country has a larger proportion of labour to the capital it will have a comparative advantage in the production of labour-intensive goods.Also because labour will be relatively cheaper.
Limitations of comparative advantage?
Assumes no transport costs exist, In reality, these costs can entirely outweigh the gain from comparative advantage. These costs are incurred from distributing the exported goods(Shipping).
Assumes all countries produce identical goods.
Assumes costs do not change over time(ignores economies and diseconomies of scale)
Assumes workers can easily switch from one task to another-Structural unemployment is ignored.
Assumes free trade
Externalities are ignored
Perfect knowledge and awareness of comparative advantage in trading partners. Other motivations (such as political/historical) may be more influential in determining trading partners. Consumer preferences may also be taken into account.
What is an exchange rate?
The value of a currency expressed in terms of another currency.First currency is base currency, second is quote currency
What is a floating exchange rate?
The exchange rate is determined by the interaction of demand and supply on the forex markets.
What is a fixed exchange rate?
The value of a domestic currency is fixed relative the government or central bank to another country.
