Wk5: Understanding International Context

Question 1

Describe Free Trade

Answer 1

Free Trade is the absence of restrictions to the flow of goods and services between countries. The benefits of free trade include prosperity in poor countries, lower prices for consumers and firms, greater consumer choice, higher living standards.

Question 2

Differentiate between absolute and comparative advantage

Answer 2

Absolute advantage state that a country should only produce products in which it has an absolute advantage or can produce using fewer resources than another country. Comparative Advantage states it is beneficial for two countries to trade regardless if one has an advantage as only relative efficiency matters.

Question 3

Describe types of economies of scale and its connection to international trade

Answer 3

Mutually beneficial trade can result from economies of scale as it enables countries to produce a limited range of goods without sacrificing variety in consumption, enabling countries to produce more efficiently rather than producing everything themselves. The types of economies of scale include external (cost per unit of output depends on industry size) or internal (cost per unit depends on the size of the firm). An industry where economies of scale are purely external then the industry will consist of many small firms and be perfectly competitive. External economies of scale can exist due to specialised suppliers, labour market pooling and knowledge spillovers. Internal economies of scale result when large firms have a cost advantage over small firms causing imperfect competition.

Question 4

What are the main forces for local responsiveness?

Answer 4

1. Cultural differences (tastes and preferences, ways of doing business)
2. National infrastructure (tech standards, distribution channels)
3. Government Channels (national laws, host country pressures)
4. Local Competitors (appeal to nationalism)