Trade Flashcards
What is the principle behind the need for trade?
“We can all be better off by trading with one another because trade allows total production to be maximised”
What is the ideal production possibility frontier?
Shows the relationship between the maximum production of one good for a given level of production for another good
It assumes we use all resources efficiently
The slope of the curve represents the opportunity cost of production; a linear curve shows a constant opportunity cost
What does a realistic production possibility frontier look like?
The opportunity cost is not constant, but rather increases over production
When you first increase, the resources will be generally well-tailored for production
However, as production increases, resources (which may not be well-tailored) need to be pulled away from other productive activities
This is known as the ‘low hanging fruit’ principle
What are the two types of advantages in relation to trade?
An absolute advantage is when an economic agent can produce more output than another agent with the same resources
A comparative advantage is the ability of one economic agent to produce at a lower opportunity cost than another
It measures the cost of production in terms of forgone production
Someone almost always has a comparative advantage – one person cannot have two comparative advantages
What do the ‘terms of trade’ refer to?
Refers to the ‘price’ of one good in terms of the other; the exchange rate between two goods
The range is between the opportunity costs of the two goods
When should a nation export/import?
When a nation exports a good, it means that they have a comparative advantage in producing that good compared to the rest of the world
When a nation imports a good, it means that they have a higher opportunity costs compared to the rest of the world
Explore how nations determine how much to trade
Explore the process of an economy becoming an exporter
If a country is a net exporter, the domestic price must be below the world price
This is indicative of a comparative advantage
An economy becoming a net exporter has mixed impacts on the different sectors
The higher price means that consumers decrease demand and decrease consumer surplus
The increased price, plus increased production for the world market means that firms increase their producer surplus
Overall, there is an increase in total economic surplus
Explore the process of an economy becoming an importer
If a country is a net importer, the domestic price must be above the world price
This indicates the country does not have a comparative advantage
An economy becoming a net importer has mixed impacts on the different sectors
The lower price means that demand increases and consumers purchase more, leading to an increase in consumer surplus
The lower price means firms produce less, decreasing their producer surplus
Overall, there is an increase in total economic surplus
What are some of the arguments against free trade?
National Security
Dangerous to rely on other countries if you think you or they will come under military attack
Production Security
Supply Chain Issues
Fear of Globalisation
Loss of Identity/Differences in Countries
Environmental Resource Concerns
High polluting countries may be able to produce goods cheaper
Thus the creation of ‘pollution havens’
Infant Industry Argument
Protection of fledgling domestic industries against more advanced and established global competitors
The same applies to sunset industries – closing them down slowly to protect employees and the economy
What is a tariff, and what effect does it have on economic surplus?
A tariff is like a tax on imports – it will increase the price of an imported good
The imposition of a tariff will have mixed effects on the sectors of the economy
By increasing the cost of the product, it reduces the consumer surplus while simultaneously increasing the producer surplus
It also increases the government surplus by raising revenue
However, it ultimately leads to inefficiency and a deadweight loss in the market
What is a quota, and what effects does it have on economic surplus?
Decreases the amount of a good that is imported into the domestic economy
Quantity restriction
Effectively increases the price, increasing domestic supply and decreasing domestic demand
What are the three ways in which a quota can be allocated?
Government sell/auction off the right
Government gains the benefits
Government grants the right to import to a domestic firm
Domestic firm gain benefits
Government grants the right to import to a foreign firm
Foreign firm gains benefits
This one is less likely
