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When does Bilateral trade between two countries tends to be larger?
If one of the countries has higher GDP.
What differences points Ricardian model out?
The differences in Productivity in different sectors.
Why do countries trade?
- Countries are different
- Economics of scale
When does Bilateral trade between two countries tends to be LESS?
If the geographical distance is greater.
What differences points Heckscher -Ohlin model out?
The differences in supply of factors of Production.
When does External economics of scale occur?
When firms in a sector are more efficient if the sector is larger at a particular location.
When does Internal economies of scale occur?
When larger firms are more efficient than small firms.
What does trade help with?
Countries that are better at producing one thing can focus on that and export the product and import the product that they don’t produce.
What is Opportunity cost?
The value of what cannot be produced when you use your resources to produce a particular good or service.
Who has Comperative advantage?
The one that can produce the same thing at a lower opportunity cost, example, the country whose car production needs to be reduced the least if they choose to grow more tomatoes has a comperative advantage.
What is crucial for trade?
Comparative advantage
What happens if countries specialize in production where they have a comparative advantage?
Both countries will be better off.
How do we get Greater world production?
With specialization.
What does The Ricardian model illustrate?
The Ricardian model shows that comparative advantage is a key determinant of trade patterns, and that trade and gains from trade depend on differences in productivity but all countries can benefit from trade, regardless of how productive they are.
What are the Assumptions of the Riccardian model?
- Two countries
- Two products
- One factor of production: Labour
- Differences in labour productivity in the two sectors and in the two countries.
