Trade Flashcards
What is comparative advantage?
Where a country can produce a good at a lower input cost than other countries (more efficiently)
What is Ricardian theory?
Uses 2 country’s and 2 commodities to demonstrate comparative and absolute advantage.
Argues that countries should use specialisation to only produce goods they have comparative advantage of.
What is specialisation?
= a method of production where a business or area focuses on the production of a limited amount of goods or services in order to gain greater degrees of productive efficiency
What is net output gain?
=the difference in the amount a country can produce before and after specialisation
If a country has absolute advantage in both goods, there is no net output gain.
Can be partial specialisation
What are the advantages of specialisation?
- should increase both productive and allocative efficiency
* competition between countries should lead to dynamic efficiency
How do you work out who has absolute/comparative advantage?
absolute= which country produces more
comparative= •maximum output of good wanted/ maximum output of other good •^do for both countries •which ever has the lowest opportunity cost should specialise in the good
Pros and cons of Ricardian theory?
✔️helps to evaluate patterns of trade
✔️helps to determine whether a country is importing from the most efficient country
✖️restrictive as based on only 2 countries+commodities
✖️ignores transport+other costs of trade (tariffs)
✖unrealistic as exchange rate must be favourable in both countries
What is the Terms of Trade (TOT)?
=ratio between import and export prices
Higher price of exports (spiced)= improvement in TOT
Lower price of exports (wpidec)= decline in TOT
How do you calculate TOT?
index of export prices/
index of import prices
x 100
What causes a change in TOT?
- inflation
- value of the currency
- depends on elasticities of demand for imports+exports
What are the effects of TOT?
•can be used to measure the strength of an economy (though not always accurate)
-US de-valued $ so TOT deteriorated but still a strong economy
•can impact inflation as measures import prices
What is the Marshall-Lerner theory?
Devaluation or depreciation of a currency will lead to an overall improvement in the current account if combined PEDs of imports+exports exceed 1 (are elastic).
What is the definition of absolute advantage?
Where a county using a given resource is able to produce more than other countries with the same input.
What is protectionism?
Deliberate restriction of the free movement of goods and services between countries and trade blocs
What is a trade bloc?
A number of countries who have a trade agreement to reduce barriers and improve the flow of goods and services between these countries.
E.g The EU
