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Economics (Macro) > Trade Theory > Flashcards

Trade Theory Flashcards

1
Q

What is the basis of trade

A

Different countries have different factor endowments which allows for international specialisation

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2
Q

What is comparative advantage

A

Where the opportunity cost of producing a good is greater in country X and so it is relatively more beneficial to produce in good Y with at a lower opportunity cost

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3
Q

When does comparative advantage not take place

A

If opportunity costs are the same

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4
Q

When are the rules of comparative advantage more applicable in practice

A
  • When the product is more homogeneous
  • In geographical zones around the world
  • Consumers like variety (different countries make multiple varieties of the same product)
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5
Q

What is the importance of geographical zones in the practicality of the rules of comparative advantage

A

Shipping costs and perishability can negate the benefits of lowest cost production

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6
Q

Who is the economist who proposed the theory of comparative advantage

A

David Ricardo

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7
Q

What is the main form of protectionism

A

Tariff

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8
Q

Draw the tariff diagram

A

Notes

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9
Q

What is the negative effect of a tariff on domestic industry

A

Raises price level which allows for relatively inefficient domestic producers to remain in the market since they weren’t efficient enough to compete at the world price

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10
Q

How is some of the increased price in a tariff wasted

A

To support domestic producers inefficiencies

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11
Q

What type of tax on consumers is a tariff

A

A hidden regressive tax

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12
Q

Why may a subsidy be not be a better alternative to support domestic industries

A

Will have to be paid out of progressive tax therefore consumers will be unhappy
(yet in effect it doesn’t matter which as they both mean consumers pay more)

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13
Q

Give 5 reasons for using a tariff

A
  • Protect domestic industry from foreign competition
  • Infant industry argument
  • Protection against dumping
  • Protection of nationally important industries
  • Way of life argument
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14
Q

How does a tariff protect domestic industry

A

Supports relatively less competitive domestic industries

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15
Q

What is the Infant industry argument

A

Protect new industries when they start up as they develop

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16
Q

What two downsides to the Infant industry argument

A

Tariffs are often not removed after the industry develops
Protecting the industry doesn’t allow it to develop the competitiveness required to survive in the global market

17
Q

What is dumping

A

Unfair competition often due to a state subsidy in another country, excess supply is generated and then dumped

18
Q

Give an example of trade war

A

EU hits China with big taxes in E.V sales battle (10% to 45%)
E.U politicians saying state subsidies means China is Dumping
China retaliated by placing a tariff on French cognac
EU said it would challenge this at WTO (WTO no legal standing)
China claims its also an anti dumping measure

19
Q

How might the EU placing tariffs on E.V imports from China affect green targets

A

May stop EU from meeting green targets by reducing low cost EVs

20
Q

Give an example of a EU member against the tariff on Chinese EVs

A

Germany - they export many cars to China

21
Q

Give an example of the way of life argument for tariffs

A

Norway places tariffs on fiberglass canoes since culturally they make canoes from wood

22
Q

Give 4 examples other than tariffs of protectionism

A

Quota
Embargo
Bureaucratic restrictions
Competitive devaluation

23
Q

What is a quota

A

Restricting supply

24
Q

What is an embargo

A

A ban

25
Q

Give an example of a competitive devaluation

A

Chinas artificially low value currency

26
Q

Give an example of a customs union

A

EU

27
Q

What are the four freedoms within a custom union

A

Goods
Labour
Services
Capital

28
Q

Give an example of a free trade area

A

NAFTA
USA
Canada
Mexico

29
Q

What is a free trade area

A

Free trade with each other but each country can set its own tariffs unlike EU

30
Q

What does full monetery union within due to a single currency mean

A

No currency has any control over the interest rate

31
Q

Who controls the interest rate in the EU

A

The ECB

32
Q

What is the role of the WTO

A

To reduce the impact of tariffs worldwide and promote free trade

33
Q

Why does the WTO have minimal effect

A

Imperial evidence suggests they have minimal effect due to no legal standing

34
Q

Give an example of the WTO being effective

A

Boeing/Airbus subsidy debate between the USA and EU

35
Q

Give an example of the WTO being ineffective

A

The 2021 Doha round
Still ongoing due to lack of consensus

36
Q

What may be a reason for the WTO’s ineffectiveness

A

WTO framework is out of date
Factors such as E-commerce and intellectual property rights don’t get taken account

Economics (Macro) (10 decks)

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