Trade Flashcards
advantages to international trade
- countries can’t produce all the things they want/need because of uneven distribution of resources
- can give countries access to resources and products they would not otherwise have. countries can export things in order to import what they want eg Uk exports machinery and vehicle parts in order to import tea, rice and diamonds
- increased competition can lead to lower prices and more product innovation, so living standards raised from more choice, better quality and cheaper goods
- additional markets (markets abroad) allow firms to exploit EOS (if additional markets cause increase in demand for products)
- can expose firms to new ideas/skills eg MNCs bringing new manufacturing methods to developing country
- allows countries to specialise in g/s they are best at producing
why do countries specialise
- they have the resources to produce the good or service efficiently
- they are better than other countries at producing the good or service
advantages + disadvantages of specialisation
Advantages
- costs are reduced, can be passed on to consumers as lower prices
- the world’s resources are used more efficiently
- global output is increased and living standards are raised
Disadvantages
- domestic industries forced to shut down because foreign firms are better at producing the good/service
- can lead to overreliance on one industry and if something were to happen to it, could have huge impacts on whole economy
- countries vulnerable to cuts in supply of goods they import
- if country specialises, other industries suffer and workers from them struggle to find work (lack relevant skills)
disadvantages to international trade
- trading internationally usually involves higher transport costs
- currency exchanges when trading abroad can carry costs, can result in financial loss
- other costs apply to international firms eg complying with foreign legal requirements, translating legal documents, and performing market research for overseas markets
what is absolute advantage?
when a country’s output of a product is greater (per unit of resource used) than any other country
- essentially they produce it more efficiently than any other country
simplifying condition model for absolute advantage
country A: 1000 units of chips and 5000 units of chocolate
country B: 2000 units of chips and 3000 units of chocolate
In this scenario, world production of chips is 3000 units and chocolate is 8000
after specialisation (so all resources go towards making what they are good at) this changes
world production of chips becomes 4000 and chocolate 10,000
this is because instead of splitting resources equally between the two products, production of the specialised will double!
what is opportunity cost in comparative advantage?
opportunity cost is the benefit given up in order to do something else
- in CA, it’s the number of units of one good not made in order to make one unit of another good
what is comparative advantage?
a country has CA if the opportunity cost of it producing a good is lower than the opportunity cost for other countries
flashcard not finished, didn’t really understand book explanation
problems with the law of comparative advantage
based on many assumptions so its hard to apply in real world, it assumes that:
- there are no EOS or DOS
- no transport costs or barriers to trade
- there’s perfect knowledge
also externalities are ignored
terms of trade formula
terms of trade= index of avg export price/ index of avg import price
what does a PPF show
the maximum amount of two goods/services an economy can produce with a fixed level of resources
what graph can be used to show comparative advantage
PPF
how do you show which country has which comparative advantage
the country with the gentler gradient has comparative advantage in the good on X axis and the opposite for the Y axis
how can countries consume outside their PPF
explain and use example where country 1 has CA in wheat and country 2 has CA in coffee
how can you show on the PPF diagram
specialisation and trade
- if country 1 exports 2000 units of wheat to country 2, and country exports 1500 coffee then they can each consume more than they could inside the PPF
- draw point slightly past the ppf curve, make sure to explain why its not on the curve
how do benefits of trade vary between developed, developing and emerging economies
Developed:
- imports crucial to maintain high standards of living
- products often cheaper when bought from abroad (cheaper labour)
Developing
- can import goods they don’t have tech to produce, so higher standard of living
- gives access to new materials, so new industries created to make new products (improves their economies)
Emerging
- able to buy cheaper goods from developing countries
- also import goods and services they don’t have tech to make themselves
