Trade

Question 1

Absolute advantage

Answer 1

A country can produce a good or service using fewer resources than another country.

Question 2

Comparative advantage

Answer 2

Measured in terms of opportunity cost. The country with the least opportunity cost when producing a good possess comparative advantage in that good.

Question 3

Partial vs complete specialisation

Answer 3

When one country has absolute advantage in both goods, complete specialisation doesn’t result in a net output gain.
However, partial specialisation can produce net output gains.

Question 4

Why does comparative make a strong case for governments to allow free trade?

Answer 4

Efficiency on a global scale will be increased if countries specialised where they have comparative advantage and can trade freely with other countries.

Question 5

Why in reality will countries not specialise completely?

Answer 5

Due to transport costs, lack of perfect knowledge and strategic reasons.

Question 6

UK trade

Answer 6

• Uk has fairly open economy

- Foreign trade accounts for around 30% of the country’s GDP.

Question 7

Gradual change in the patterns of UK trade

Answer 7

• Moved away from commonwealth to EU and North America
• EU currently accounts for majority of imports and exports
• Decline in exports of manufactured goods
• Growth in services
• Faster growth in imports than exports- causing deficit
• China and India are significant for exports- still only account for a small share.

Question 8

Benefits of trade

Answer 8

• Increased overall global output (resulted from CA)
• Greater competition (opens international borders)
• Employment opportunities (Export industries)
• Encouragement of specialisation leading to greater efficiency (drives down costs and unit prices)
• Improved quality of goods and services (from increased competition and dynamic efficiency)

Question 9

Drawbacks of trade

Answer 9

• Dumping (those with large AA drives local producers out markets)
• Environmental concerns (Transport uses scarce resources)
• Over-specialisation (If world demand falls it can cause problems for economies)
• Structural unemployment (From over-specialisation)
• Infant industries (Struggle to compete with MNCs)

Question 10

The growth of trading blocs

Answer 10

• Eg. EU and NAFTA
• ## Encourage greater free trade amongst members, discouraging trade between non-members.

Question 11

Emergence of middle income countries (MICs)

Answer 11

• Eg. India and China have become significant global players in terms of all aspects of trade.
• Collapse of communism in Russia and other Eastern bloc states has opened up global markets significantly.

Question 12

Deindustrialisation

Answer 12

• Comparative advantage in the production of many goods has shifted to China, India and the Far East.
• Eg. in the UK and traditional western nations
• However this has been replaced with growth in the provision of financial services and other tertiary markets.

Question 13

UK Balance of payments for goods and services

Answer 13

• Deficit on the balance of payments current account in terms of goods but surplus in terms of services

Question 14

Protectionist policies

Answer 14

• Tariffs on imported goods
• Quotas (limits on volume of imported goods) (Eg. China limit of corn)
• Embargoes (A total ban on imported products) (Eg. Uk’s embargo on Syrian oil)
• Subsidies to domestic firms
• Administrative barriers (Eg. health and safety, complex legal forms to increase costs and reduce imports)