Trade

Question 1

international trade defo?

Answer 1

exchange of products

Question 2

Whi does trade take place between?

Answer 2

economic agents of a country

Question 3

What are static gains of trade?

Answer 3

improvements in allocative and productive effeciency in markets

Question 4

What are dynamic gains in a market?

Answer 4

the gains in welfare from improved product quality, increased choice and faster and more innovative behaviour

Question 5

what is free trade?

Answer 5

international trade free from artificial barriers such as import tariffs or quotas

Question 6

Who came up with comparative advantages?

Answer 6

david ricardo

Question 7

What is opportunity cost?

Answer 7

measures the cost of any choice in terms of the next best alternative foregone

Question 8

Opportunity cost formula ?

Answer 8

amount of good B given up / amount of good A produced

Question 9

When does comparative advantage exist?

Answer 9

• relative opportunity cost of production for a good or service is lower then another country
• a country is relatively more productively effecient than another

Question 10

What does comparative advantage lead to?

Answer 10

gains from specialisation and trade leading to a more effecient allocation of scarce resources

Question 11

What is absolute advantage?

Answer 11

occurs when a country can produce a product using fewer resources than another nation

Question 12

Define comparative advantage?

Answer 12

focuses on when a country has lower relative opportunity cost when it decides to specialise in a particular product

Question 13

What are the terms of trade?

Answer 13

index of export prices / index of import prices

Question 14

assumptions behind comparative advantage?

Answer 14

• constant returns to scale
• factor mobility between industries
• no import controls
• low transportation costs
• ignores externalities

Question 15

what are the key factors determining comparative advantage?

Answer 15

• quantity and quality of natural resources available
• demographics
• rates of capital
• investment in R+D

Question 16

How does allocative efficiency impact trade?

Answer 16

competition from lower cost import sources drives market price down and reduces monopoly profits

Question 17

how does productive efficiency impact trade?

Answer 17

specializing and selling in larger markets encourages increasing returns to scale

Question 18

Dynamic efficiency impact on trade>

Answer 18

open economies may see more innovative buisness who invest more in research and development and also in the human capital of workforce raising productivity

Question 19

x effeciency impact on trade?

Answer 19

intense competition in markets will provide a discipline on businesses to keep their lower unit costs under control and maintain competitive

Question 20

What are the dynamic gains from trade>

Answer 20

• gives access to new and cheaper imports
• make domestic economy more productive
• economies of scale
• increased competition and innovation

Question 21

What are the downsides of international trade?

Answer 21

• transport costs
• negative externalities from production and consumption
• risk of structural unemployment
• rising inequality
• pressure on wages and working conditions
• risks from global external shocks

Question 22

What does successful trade provide for developing countries?

Answer 22

• foreign currency helping BoP
• injection of demand into circular flow of income
• increased employment
• falling prices for consumers