trade Flashcards
what is comparative advantage
when a country can produce a good or service at a lower opportunity cost than another country - means they have to give up producing less of another good than another country - using the same resources
what is absolute advantage
a country’s absolute advantage in the production of a G/S if it can produce it using fewer resources and at a lower cost than another country
what is free trade
the act of trading between nations without protectionist barriers
benefits of free trade (4)
more exports could lead to higher rates of economic growth
specialising means countries can exploit economies of scale - lower their average cost
free trade increases economic efficiency - establishes a competitive market - lower cost of production - increased output
countries can exploit their comparative advantage - leads to a higher output using fewer resources - increasing world GDP - improves living standards
costs of free trade (2)
free trade has resulted in some job losses - since countries with lower labour costs have entered the market
free trade might have contributed to some environmental damage - especially form increased manufacturing and shipping
how has comparative advantage changed patterns of trade between the UK and rest of the world
has been recent growth in the exports of manufactured goods from developing countries to developed countries - because developing countries have gained an advantage in the production of manufactured goods - due to their lower labour costs - so production shifts abroad
how has deindustrilization affected UK trade
it has meant that ,manufacturing sector has declined - means that production of manufactured goods has shifted to there countries - such as china - while the UK focuses more on services - finance
how much does international trade contribute to LEDC economies
20%
how have trading blocs changed patterns of trade
trade has been created between members but diverted from elsewhere - occurs when trade shifts to a less efficient producer - country may switch from a cheap external producer to a more expensive one within the trading bloc
how have policies of developed countries effected trade patterns
they limit the ability of developing countries to export primary commodities - e.g. CAP means domestic farmers receive subsidies to encourage production and lower costs - increases the income of domestic farmers and protects the industry - hard for farmers in other countries to compete - therefore not able to access the market in developed countries - limits participation in trade
what is protectionism
the act of guarding a country’s industries from foreign competition using methods such as tariffs
what are tariffs
tariffs are taxes on imports to a country
costs of tariffs
may lead to retaliation between countries - therefore decreasing number of exports - as other countries may want to do the same back
what is the impact of tariffs
is that the quantity demanded of domestic goods increases - while the quantity demanded of imports decreases
what does a quota do
a quota limits the quantity of a foreign produced good that is sold in the domestic market - it sets a physical limit on a specific good imported in a set amount of time - leads to a rise in the price of the good for domestic consumers - greater cost to consumers
what are export subsidies
form of gov intervention to encourage goods to be exported rather than sold on the domestic market - gov may use direct payments, cheap access to credit
what are embargoes
this is the complete ban on trade with a particular country - usually political motivation
what is red tape
excessive administration increases the cost of trading - discourages imports - makes it difficult to trade with countries imposing red tape - particularly harmful for developing countries which are unable to access these markets
its hard tpo notice - this y its used
how do protectionist measures reduce trade deficits
because countries will be importing less due to tariffs and quotas on imports
exports may be greater than imports
how does protectionism help small businesses
protectionism is usually short term means domestic producers can trade freely without external competition
how can protectionism distort the market
it can lead to a loss of allocative efficiency - as it prevents industries from competing in a competitive market and there is a loss of consumer welfare
consumers face higher prices and less variety - by not competing in a competitive market firms have less incentive to lower their costs of production
how do tariffs increase inequality
they are regressive - and are therefore most damaging to people on low incomes - as they have to pay more of their disposable income
