Trade

Question 1

define absolute adv

Answer 1

when a country can produce more goods or services compared to another country using the same resources= same FOP
= country A is more productive than B due to lower COP

Question 2

is absolute adv valid?

Answer 2

• too simplistic? questioned by economist David Ricardo
  = absolute adv doesn’t include opportunity cost
  = must be factored in to find who is lowest cost producer
  = created comp adv

Question 3

define comparative adv

Answer 3

• a country should specialise in producing goods and services where they have a lower opportunity cost compared to another country

Question 4

describe specialisation

Answer 4

when a business or country focuses its resources on a specific area of production
= firms should divert their resources to producing goods at lowest OC
= would make trade mutually beneficial

Question 5

adv of comparative adv

Answer 5

• CA means we get max output
  = gains from specialisation as countries divert resources away from inefficient production= max output produced= countries can consume beyond PPF
• receive lowest prices= low OC= low COP= lowest possible cost for global producers
• resources will be transferred to countries that are the most efficient producers
  = max output and satisfy consumer demand= allocative effiency

Question 6

disadv of comparative adv

Answer 6

• where does CA come from?
  = may just be lucky and have high natural resources= agriculture etc or China’s huge labour force increased their Q of labour
  = UK has CA in financial services due to higher skilled sector workers
• hard for country to maintain adv

Question 7

reasons for patterns of trade

Answer 7

• comp adv= low COP= high AE
• countries are members of trading blocs e.g. EU or NAFTA
  = naturally trade w countries within trading bloc due to free-trade benefits compared to countries outside of it who have protections measures
• protections barriers block exports and imports= won’t trade if there are high tariffs and quotas
• transport costs
  = UK doesn’t trade as much w far away countries like Aus mostly trade w Europe and US= high transport costs discourage trade and make prices uncompetitive compared to closer goods
• non-price factors
  = may have CA but other countries can offer brand loyalty, marketing and higher quality= may ignore country w CA

Question 8

assumptions of comp adv

Answer 8

• no transport costs
• perf info
• no R+D/ innovation
• no EoS

Question 9

benefits of trade and development

Answer 9

• exploit CA through specialisation and exporting low cost goods
  = attract natural resources in developing countries due to abundance of natural resources like trees and minerals
  = can sell to countries who demand them= have power to increase prices
  = increase growth due to high AD caused by more exports
• consumers benefit from low prices due to large markets which have comp prices= also more choice
• markets grow and increase output= decrease AC and COP= gain Eos benefits= create efficiency gains that can be transferred to profit
  = Govs collect corporate tax revenue to promote development
• opening markets can import new, modern capital goods= promote technological transfer as countries can copy other recent developments in tech etc
  = use them to improve domestic production= AE and lower COP in LR
• if firms can make high profits= can re-invest back into business to improve tech= dynamic efficiency gains= able to break away from primary sector dependence and focus on secondary tech-based production

Question 10

disadv of trade and development

Answer 10

• ‘resource curse’= developing countries rely on exports of primary commodities for their growth and development
  = BUT, future prices of primary goods may fall due to low AD etc= would decrease export revenue= low incomes and profits
• primary resources will eventually run out as their finite= once gone, key avenue for growth will be closed= unsustainable way of pursuing development
• primary commodities are suspect able to price fluctuations
  = demand and supply for primary goods may be inelastic= few substitutes, takes ages to grow and harvest and seen as necessary= change in market conditions would cause huge price swings= less investment and create uncertainty of export profit and revenue
• access to international markets may be limited
  = developed countries may impose protectionist measures on exports of primary goods e.g. US subsidised domestic corn in order to decrease domestic COP and decrease prices= make US more competitive than other countries w higher COP
• depends on tariff regulation as high regulations would de-incentivise to move away from primary commodities sector dependence
  = manufactured goods have higher tariffs than primary goods
  = increase costs of producing 2nd sector goods
• long term decline in terms of trade as export prices that are relative ti import prices may fall= harder to sustain revenues and growth in LR
  = countries become trapped in primary sector= decrease revenue, growth and development

Question 11

policies to promote trade

Answer 11

• import substitution industrialisation (ISI)
  = tariffs on imported manufactured goods to allow domestic industries to grow and compete w other countries
  = own economy can build manufactured sector to move away from primary sector
• tariffs on imported goods

Question 12

adv of policies to promote trade

Answer 12

• protects domestic jobs
  = created sustained job creation in those industries
• protects economy from foreign influence and potential dominance of MNCs
  = producing own economy for growth and development
  = own industries can be relied on for growth
  = decrease potential influence of MNCs over policy making on conditions in domestic economy

Question 13

disadv of policies to promote trade

Answer 13

• in LR it restricts growth= restricting imports of important capital goods, size of markets to trade w= increase costs etc and LR growth
• loss of comp adv= cant compete w rivals overseas as a domestic industry