Trade Theory- Compeditive And Aboslute Advatage

Question 1

Why is trade significant

Answer 1

• Improves resource allocation eg. Aus firms can access overseas markets and benefit from increased sales of production. Consumers benefit from less expensive imports= cheaper opportunity cost
• exports are injected into the circular flow, inject spending into economy boosting income and OUTPUT

Question 2

When world price is above domestic equilibrium

Answer 2

Increases the overall market through the international market despite domestic loses to consumer surplus (diagrams required)
For example iron ore market

Question 3

Aus vs Saudi Arabia in world price and imports

Petrol

Answer 3

SA- sell petrol to citizens below world price, subsidise, likely offset the cost on other import tariffs

Aus- as a relatively inelastic good, tax received makes up for other revenue

Question 4

Gains from trade can be:

Answer 4

Static gains- caused by the improved allocation of resources occurring as a result of increased international trade

Dynamic gains- add further to economic growth and development, build in static gains, eg. Increasing scale of production capacity, or consumer choice or greater levels of competition

Question 5

Dfn absolute advantage

Answer 5

A country that can produce a product more efficiently than another

Question 6

Dfn competitive advantage

Answer 6

Opportunity cost (in terms of lost output of the other product) is less than in the other country

Question 7

The law of comparative advantage

Answer 7

Global resources can be used more efficiently when countries specialise in producing the product in which they have an absolute advantage

Question 8

Dfn terms of trade

Answer 8

The cost of one product in terms of the other eg. One car=two units of cheese

Question 9

Calculating opportunity cost

Answer 9

Other
Divided by
It