trade

Question 1

What is the pattern of trade?

Answer 1

It changes over time and can highlight how a country may shift from a goods based economy to a service based economy.

Question 2

What 4 factors influence the pattern of trade?

Answer 2

Comparative advantage
Impact of emerging economies
Changes in relative exchange rates
Growth in trading blocs

Question 3

What does the terms of trade measure?

Answer 3

Measures the ratio of export prices to import prices.

Question 4

How do you calculate the terms of trade?

Answer 4

Index terms of trade = ( index or export prices / index of import prices ) x100

Question 5

What do changes in the index of trade mean?

Answer 5

If a country’s terms of trade rises its better off. If it falls its worse off.

This is because the reduced cost push pressures in the economy, as import prices are lower compared to export prices.

Question 6

3 factors that influence the terms of trade?

Answer 6

Relative inflation rates- If prices in the country rise then the index of exports rise.

Relative productivity rates- rising productivity leads to lower unit costs which will lead to a worsening of the terms of trade if export prices are able to be reduced.

Changes in exchange rates- rise in exchange rate will lead to a fall in the price of imports.

Question 7

What impact might a change in the terms of trade have on standard of living?

Answer 7

An improvement in the ToT caused by a rise in the index of export prices may lead to fewer exports and less demand leading to job losses and lower incomes.

However an improved ToT means that a country is able to import more for the same level of exports, which improves living standards.

Question 8

What effect does an improvement in the ToT have on the balance of payments account?

Answer 8

Improved terms of trade should lead to an improvement in the balance of payments, although the impact will depend on the PED for imports and exports.

Question 9

What are trade blocs and what are their purpose?

Answer 9

Promotes and manages trade between member states. Members agree to remove protectionist measures, such as tariffs or quotas. In the aim of trade creation.

Question 10

Bilateral agreements and an example

Answer 10

Exists between two countries or trading blocs e.g. in 2018 an agreement between the EU and Japan was signed.

Question 11

Multilateral agreements and an example

Answer 11

Exists between more than 2 countries or trading blocs. e.g. the Pacific alliance free trade agreement area was formed between Chile, Columbia, Mexico and Peru.

Question 12

What are the 4 types of trading blocs?

Answer 12

Free trade area
Customs union
Common market
Monetary union

Question 13

What is a free trade area?

Answer 13

All barriers to trade between members are removed

Members can impose barriers on non member countries

Question 14

What is acustoms union?

Answer 14

All barriers to trade between members are removed
Common external tariffs imposed on non-member countries.

Question 15

What is acommon market?

Answer 15

Same features as a customs union
Labour and capital have freedom of movement within the area

Question 16

What is amonetary union?

Answer 16

All barriers to trade between members are removed
Members have a single, common currency and a central bank.

Question 17

Costs of a regional trade agreement?

Answer 17

Don’t cover a wide range of goods and services to the impact can be weak and limit economic benefits.

Reduce national sovereignty- UK decision to leave EU due to belief than sovereignty would be lost by membership.

Question 18

Benefits of a regional trade agreement?

Answer 18

Static benefits of increased specialisation and reduced average costs for firms

Dynamic benefits from the creation of increased competition within the area bloc and include increased innovation and knowledge transfer.

Increased trade within member states.

Question 19

Why did the WTO organisation originally form?

Answer 19

Due to the belief that countries needed to work together to rebuild following the second world war.

Question 20

What are the 2 key functions of the world trade organisation?

Answer 20

Facilitate the reduction or removal of protectionist barriers between countries and aim for trade liberalisation.

Make sure that countries adhere to the agreements that they have signed up to. WTO acts as a negotiator between countries to help resolve conflicts.

Question 21

What are possible conflicts between the WTO and regional trade agreements?

Answer 21

Common external tariffs contradicts the principles of the WTO.
Some argue the WTO is too powerful and favours developed countries.
Custom unions or a free trade area violates the WTOs principle of having all trading partners treated equally.