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 (3)

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

25
Give an example of a competitive devaluation and how this acts as a form of protectionism
Chinas artificially low value currency Acts as a form of protectionsim by making exports cheaper and imports relatively more expensive, which protects domestic industry by making them relatively more competitive
26
Give an example of a customs union
EU
27
What are the four freedoms within a custom union
Goods Labour Services Capital
28
Give an example of a free trade area
NAFTA USA Canada Mexico
29
What is a free trade area
Free trade with each other but each country can set its own tariffs unlike EU
30
What does full monetery union within a trade bloc due to a single currency mean
A full monetary union within a trade bloc means all member countries use the same currency and have a shared central bank that sets one interest rate and monetary policy for everyone
31
Who controls the interest rate in the EU
The ECB
32
What is the role of the WTO
To reduce the impact of tariffs worldwide and promote free trade
33
Why does the WTO have minimal effect
Imperial evidence suggests they have minimal effect due to no legal standing
34
Give an example of the WTO being effective
Boeing/Airbus subsidy debate between the USA and EU in 2021
35
Give an example of the WTO being ineffective
The 2021 Doha round Still ongoing due to lack of consensus
36
What may be a reason for the WTO's ineffectiveness
WTO framework is out of date Factors such as E-commerce and intellectual property rights don't get taken account
37
Give an example of an event indicating that the UK may be struggling with trade due to brexit.
In December 2024, the UK has became the first European nation to join CPTPP an indo-pacific trade block which includes countries like Japan, Vietnam, Peru, Chile and Malaysia Officials hope membership will boost Britain's flagging economy by as much as £2.0 billion ($2.5 billion) a year.
38
Draw the diagram showing the 4 effects of a tariff
39
Give an example of a tariffs recently placed in order protect domestic industry from foreign competition
New American tariff introductions were said to be reasoned in an attempt to revive the American steel industry, which faced difficulty to compete with Chinas low costs of production But hesitation due to strong reactions from the global financial markets may mean this is not the best idea, and allowing the laws of comparative advantage to take place may be a more suitable option