Trade And Integration - Ch2 Of Piercy Flashcards
What is comparative advantage?
Where one country produces a good or service at a lower relative opportunity cost than others
What is an absolute advantage?
Where one country is able to produce more of a good or service with the same amount of resources, such that the unit cost of production is lower
Explain comparative advantage
Even if one country is more efficient at producing both goods, it would still make better use if they specialised in one, and traded with a country whose opportunity cost is lower.
What are terms of trade?
The price of a country’s exports relative to the price of its imports
What are the benefits of using comparative advantage to trade?
Each country becomes able to consume more than they could produce themselves.
Why do economies have these relative productive efficiencies?
Economies have different factor endowments. The production of goods require different factor intensities. Countries with more labour resources will have a comparative advantage in labour intensive production, and countries with abundant capital will have a comparative advantage in capital intensive production
How can comparative advantage change over time?
As GDP rises, higher levels of saving will cause accumulation of capital, more expenditure on education will improve workforce, all changing factor intensities and hence comparative advantage
What is the impact of international trade on global production?
Global production is increased
What are the effects of international trade?
Economies of scale Increase in global GDP Increase in competitions Dynamic efficiencies Factor prices
How does international trade effect economies of scale? Why?
Increases it. Without international trade, the production of goods and services would be limited to the domestic market. Firms being able to supply to the global market means their production increases, and hence their average costs decrease
Give a drawback of international trade causing economies of scale
Initially, some industries do t have the economies of scale, and hence can’t compete in a global market. They may require protection through tariffs, and import quotas
How does international trade cause competition?
More firms in the market
How does international trade cause firms to be more efficient?
The increased competition for domestic firms puts downward pressure on prices, which will reduce firms profits. In order for firms to retain their profits, they must lower average costs, eliminate waste and become more efficient
