Unit 3 - 1

Question 1

What is absolute advantage?

Answer 1

Situation where some countries are more efficient at producing some goods and services and other countries are better at producing others

1. Greater world output
2. Increased standards of living

Question 2

What is comparative advantage?

Answer 2

When some counties have an absolute advantage in both goods and services so they produce the good that has the lowest opportunity cost

Question 3

Why do some countries have an absolute advantage in a good?

Answer 3

1. Supplies of natural resources - UK has oil, Japan does not
2. Climatic advantages
3. Countries have workers with certain skills

Question 4

What are the problems with trade - dangers of over specialisation?

Answer 4

A country may build up a large industry by specialising and developing s large export market but they may then lost this market to - technical progress producing a highly competitive substitute or another country may become more efficient

Question 5

What are the problems with trade - immobilities?

Answer 5

1. Machinery and labour cannot be easily transferred to another industry
2. Geographically and Occupationally immobile

Question 6

What are the arguments for protectionism?

Answer 6

1. To protect employment - when cheap imports are putting firms out of business
2. To protect infant industries- small new industries cannot compete with established large scale foreign competitors, should be protected until they can compete on their own
3. To protect strategic industries - if the industry is considered key to the economy the government can protect this industry from decline
4. For political reasons or retaliation - of one country places barriers on imports another country could do the same back
5. To protect dumping - selling goods at below cost hard for domestic firms to compete
6. Consumer protection - protecting consumers from harmful goods
7. Environmental protection

Question 7

What are the arguments against protectionism?

Answer 7

1. Retaliation and political issues - sometimes lead to trade wars - less exports - worse off - decreased world output
2. Competition - reduced competition - increased inefficiency amongst domestic producers - rising costs and prices
3. Consumer choice - increased choice, cheaper, better quality goods
4. Developing economies
5. Inefficiency - if inefficient industries are protected, world resources may be misallocated or wasted

Question 8

What are the methods of protectionism?

Answer 8

1. Tariffs - tax on imports, increased cost for the exporter who has to decide whether to take a cut in profits or raise the price which may affect sales
2. Subsidies - money given to firms to decrease the costs of their production
3. Quotas - a limit on the amount of goods coming into a country from another country
4. Embargoes - complete ban on trade with a country
5. Soft Loans - government lends money at lower interest rates to domestic firms
6. Imposing strict health and safety standards

Question 9

What is the definition of trade barriers?

Answer 9

1. Obstacles that prevent/make it difficult for a firm to enter a country
2. Lead to domestic firms increase in profits

Question 10

What is the EU?

Answer 10

1. Single market
2. Restrictions between free movement of goods removed
3. Maintained restrictions on goods coming from outside the EU

Question 11

What is the world trade organisation?

Answer 11

1. 159 member countries
2. Exists to negotiate reductions and removal of trade barriers between member countries
3. A country can complain to the WTO about restrictions who can order a country to change their policy

Question 12

What is the balance of payments?

Answer 12

1. A statement of the flows of money between the UK and the rest of the world over a period of time
2. the government collects the info from businesses which must give details of any trade and financial dealings with people abroad
3. Split into two parts
   - 1. CURRENT ACCOUNT
   - 2. CAPITAL AND FINANCIAL ACCOUNT

Question 13

What does the current account state?

Answer 13

Records the trade in goods, services, investment income and current transfers

Question 14

What is the definition of trade in goods?

Answer 14

Tangible goods traded between countries

For years the UK has had a deficit

Question 15

What is the definition of trade in services?

Answer 15

Includes government services eg. Earnings paid to foreign banks and insurance companies or earned by UK banks and insurance companies

Question 16

What does the investment income part of the current account state?

Answer 16

Consist of mainly INTEREST, PROFITS, and DIVIDENDS

1. INTEREST - includes payments for loans made by foreign banks to UK firms and earnings from loans given by UK banks
2. PROFITS - made by foreign-owned companies in the UK are sent back to the home country and profits made from UK-owned firms overseas come back to the UK
3. DIVIDENDS - earnings from shares owned overseas and payments to foreign shareholders of companies in the UK

Question 17

What does the current transfers parts of the current account state?

Answer 17

1. Includes government transfers and private transfers
2. Government transfers - grants and aid to other countries
3. Private transfers - individual transfers of assets to foreign bank accounts or from foreign bank accounts

Question 18

What is the capital account?

Answer 18

1. Shows transfer of ownership of fixed assets
2. Usually surplus in the UK
3. Shows:
   - government investment grants
   - purchases and sale of patents
   - land for foreign embassies
   - franchises
   - leases

Question 19

What does the financial account show?

Answer 19

Records both short term and long term monetary transactions between the UK and other countries

• DIRECT INVESTMENT
• PORTFOLIO INVESTMENT
• OTHER INVESTMENT
• RESERVE ASSETS

Question 20

What is DIRECT INVESTMENT?

Answer 20

1. Investment in land, premises and equipment made by UK companies setting up branches overseas

Question 21

What is PORTFOLIO INVESTMENT?

Answer 21

Flows of money to buy stocks and shares overseas

Question 22

What is OTHER INVESTMENT?

Answer 22

Includes UK bank lending overseas, borrowing from overseas banks by the UK firms

Question 23

What is RESERVE ASSETS?

Answer 23

Reserves of foreign currencies are kept and managed by the Banks of England on behalf of UK government
Used to balance overseas accounts and to deal in foreign exchange market

Question 24

What are the reasons for the current account deficit?

Answer 24

1. Increase in ER - price of exports rise - pride of imports decrease, therefore there is a fall in export revenue and if demand for imports is elastic then more will spend abroad
2. Increase in inflation - loss of price competitiveness means demand for exports will go down and demand for imports will go up
3. Decrease in labour productivity a loss of price competitiveness
4. Decreased quality of products
5. Decreased incomes abroad
6. Increasing domestic incomes

Question 25

What factors influence the BoP?

Answer 25

1. Price competitiveness - cost levels and UK prices relative to international competitors
2. Non-price competitiveness - quality, design, after-sales service
3. Lack of production capacity and skills shortages

Question 26

What are the problems with Current Account Surplus?

Answer 26

1. Effect on trade - if no barriers to trade due to protectionist measures it caused problems for countries exports to the country - domestic firms will becomes less efficient
2. Effect on the ER

Question 27

Why do countries trade?

Answer 27

1. To obtain goods they would be unable to produce otherwise eg. Bananas
2. More choice
3. Cheaper goods (if free trade) means increased standards of living
4. Domestic firms efficient to keep in competition
5. Economies of scale as large markets, they can grow and reduce costs
6. Cheaper raw materials for firms
7. Encourages international cooperation