week three - trade in goods and services, gains from trade Flashcards
what is the main reason for trade
specialisation has very important advantages
how does specialisation promote efficiency
given that there are opportunity costs, efficiency will increase as we allocate resources where they are more production
what macro effects does specialisation have
- economic growth
- income and wage convergence between countries
when do two countries gain from trade
when each country specialises in the good it produces at the lowest cost
what is ricardos trade theory
countries use their comparative advantages (differences in productivity) to specialise in the production of different products
what is the heckscher-ohlin model
Different factor endowments (land, labour and capital) explain specialisation between countries in different products (assumption: technologies are identical)
what is krugmans theory of international trade
considers imperfect competition, differences in productivity, and consumer preferences for product variety, to explain intra-industry trade, i.e. trade between countries with the same factor endowment
what is absolute advantage
It is the ability to produce a good using fewer production factors than another producer
what is comparative advantage
It is the ability to produce a good with the lowest opportunity cost
are gains from trade based on absolute or comparative advantage
comparative
what are some trade advantages
- scale economies
- more efficiency
- technology diffusion
- learning by doing
- greater variety
- lower prices
- increase in exports
what is the income distribution effect of trade
- in export and competitive industries, employment will increase
- in industries that compete with import industries, employment will fall
- as trade increases, the demand for the most abundant factor of production will also increase
what effect does specialisation have in different sectors
- value added to agriculture is lower than in industry
why is dependence on foreign suppliers considered unacceptable
harder to ensure national food security
when can trade not be determined by comparative advantage
if companies in different countries are subject to different laws and regulations