Unit 5.3 International Trade and Commercial policies

Question 1

Theory of Competitive Advantage - explained

Answer 1

Countries can benefit from trade by specialising in the good they are comparatively better at producing, while importing the good they are comparatively worse at producing.
Even if one country is less efficient in producing all products than another, both countries can benefit from specialisation and trade

Question 2

Opening to trade

Answer 2

Closed economy: basic starting case
Open economy + no regulations on trade
- The one with higher closed economy market price becomes importer
- The one with lower closed economy market price becomes exporter

Question 3

Effects of opening the economy to trade

Answer 3

Open economy:
Importer -> Price - Producer surplus - Consumer surplus + Total welfare

Exporter -> Price + Producer surplus + consumer surplus - total welfare

Question 4

Trade policies

Answer 4

Open economy + trade regulations
1. Tariff (price tax) on imports:
- From point of view of importer country who imposes this policy
- From the point of view of exporter country who trades with the importer
2. Quota (quantity restriction) on imports:
- From the point of view of importer country who imposes this policy
- From the point of view of exporter country who trades with the importer
3. Subsidy for exports:
- From the point of view of exporter country who imposes this policy
- From the point of view of importer country who trades with the exporter