Theme 4

Question 1

What is absolute advantage

Answer 1

when a country can produce more of a good worth there same amount of resources as another country

Question 2

What is comparative advantage

Answer 2

when a country can produce a good at a lower opportunity cost than another

Question 3

What are some evaluative comments for comparative advantage

Answer 3

• assumes perfect knowledge
• no economies of scale
• R & D investment is ignored
• no transport costs
• rates of inflation ignored

Question 4

What are some advantages of specialisation and trade

Answer 4

• efficiency and output increase
• larger markets and economies fo scale
• access to wider variety of goods and lower prices for consumers
• better resource allocation
• higher economic growth and living standards

Question 5

What are the disadvnatages of specialisation and trade

Answer 5

• increased unemployment
• danger of dumping foreign firms
• global monopolies and firms become larger
• deficit in goods and services if uncompetitive

Question 6

What is unbalanced development

Answer 6

international specialisation based on free trade means that only industries where other countries have comparative advantage will be developed

Question 7

What is mutually beneficial terms of trade

Answer 7

when Theo countries specialise in a good they have comparative advantage in

Question 8

Why are countries better off with mutually beneficial terms of trade

Answer 8

• specialisation allows production to be more efficient
• total global output increases
• countries obtain goods at a lower opportunity cost
• countries obtain a mix of goods they couldn’t have produced by themselves

Question 9

What is an emerging economy

Answer 9

an economy in which the country is being a developed nation - often driven by high economic growth

Question 10

What is south south trade

Answer 10

the increase in economic exchange between developed countrioes

Question 11

What are the main reasons for south south trade

Answer 11

• rapid growth in emerging markets
• lower transport and labour costs
• regional trade agreements
• similar levels of development

Question 12

What is a trading bloc

Answer 12

a Group of countries that form agreements to promote trade among themselves

Question 13

What is terms of trade

Answer 13

a measure of a countries relative prices of exports compared to the cost of its imports

Question 14

How to calculate the ToT

Answer 14

(index of export prices / index of import prices) x 100

Question 15

What are non tariff barriers

Answer 15

policies or regulations that restrict imports and exports without involving tariffs

Question 16

What is an example of a non tariff barrier

Answer 16

• quota
• product standards
• administrative barriers

Question 17

What is protectionism

Answer 17

is measures taken by the government to restrict imports and protect domestic industries

Question 18

What are the advantages of protectionsim

Answer 18

• protects domestic jobs
• national security
• supports infant industries
• reduces trade deficits

Question 19

What are the disadvantages of protectionsim

Answer 19

• higher prices a for consumers
• inefficiency and lack of investment
• retaliation and trade wars
• reduces global efficiency

Question 20

What are the 5 types of trade blocs

Answer 20

• preferential trade area
• free trade area
• custom unions
• common market
• economic union

Question 21

What is economic integration

Answer 21

The process where countries coordinate and merge their economic policies to reduce their trade barriers and promote the free flow of goods, services, labour and capital

Question 22

What is grade liberalisation

Answer 22

the process of reducing or eliminating trade barriers such as quotas and tariffs

Question 23

What are the features of a preferential trade area

Answer 23

lower barriers but not eliminated, barriers are among members

Question 24

What are the features of a free trade area

Answer 24

they eliminate interdental barriers but maintain independent external barriers

Question 25

What are the features of a customs union

Answer 25

eliminate the internal barriers agree on common external barriers

Question 26

What are the features of a common market

Answer 26

eliminated internal barriers, adopt common external barriers, allow free movement of resources among member countries

Question 27

what are the features of an economic union

Answer 27

Eliminated internal barriers, adopt common external barriers, allow free movement of resources among member countries and a uniform set of economic policies

Question 28

When does trade creation occur

Answer 28

when a country enters a free trade agreement and becomes involved where there are lower barriers within the group

Question 29

What happens to cost of supply when you join an FTA

Answer 29

the cost decreases

Question 30

What is trade diversion

Answer 30

when imports shift from low cost countries to higher cost countries - concentrates production where opportunity costs are higher

Question 31

What are the benefits of joining a common market

Answer 31

- increased trade between members - more consumer choice - economies of scale - greater market efficiency due to specialisation

Question 32

What are the disadvantages of joining a common market

Answer 32

- loss of sovereignty - trade less with more efficient non members - risk of job displacement - more workers leads to low wages

Question 33

What helps with the success of a monetary union

Answer 33

- economic convergence - they must have similar levels of inflation etc - monetary policy authority - labour and capital mobility

Question 34

What are the 3 main components of the balance of payments

Answer 34

- current account - capital account - financial account

Question 35

What are the 4 components of the current account

Answer 35

1 - primary income 2 - secondary income 3 - trade in goods 4 - trade in services

Question 36

What is recorded in the capital account

Answer 36

the net flow of capital

Question 37

What are some examples of what is recorded in a capital account

Answer 37

- debt forgiveness - international changes in ownership

Question 38

Why is the capital account not used that regularly

Answer 38

it includes small one off transfers of assets that are irregular

Question 39

What does the financial account record

Answer 39

cross border investment flows

Question 40

What type of transactions are recorded here

Answer 40

transactions between residents and non residents of a nation

Question 41

what is a hot money flow

Answer 41

Short term high speed movements of capital across the border

Question 42

What does the IIP stand for

Answer 42

international investment position

Question 43

What does IIP measure

Answer 43

Measures the total value of assets

Question 44

When is there a net asset position

Answer 44

when: UK assets abroad > foreign assets in the UK

Question 45

When is there a net liability position

Answer 45

when: UK assets abroad < foreign assets in the UK

Question 46

What are net errors and emissions

Answer 46

reflect the imbalances that are needed to ensure that accounts in a countries BoP always sum to 0

Question 47

What are the short run causes of a current account deficit

Answer 47

- fall in value of exports - boom in consumer spending - appreciating exchange rate

Question 48

What are the long run causes of a current account deficit

Answer 48

- low rates of capital investment - high production costs - weaknesses in non price competition

Question 49

What are the causes of a current account surplus

Answer 49

- high incomes abroad - low incomes at home - low relative inflation - strong investment

Question 50

What are the consequences of a current account surplus

Answer 50

- appreciation of the exchange rate - increase in AD and growth - financial account deficit

Question 51

What is an expenditure switching policy

Answer 51

a policy designed to change the prices of imports and exports

Question 52

What is an expenditure reducing policy

Answer 52

Fiscal and monetary policies to reduce real incomes and reduce amount of imports

Question 53

What are some demand side policies used to reduce a current account imbalance

Answer 53

- raising interest rates to reduce spending - currency devaluation to make exports cheaper - reducing government spending to reduce overall demand

Question 54

What are some supply side policies used to reduce a current account imbalance

Answer 54

- investing in tech to increase export quality - tariffs and quotas reduce imports by increasing price

Question 55

What is international competitiveness

Answer 55

a countries ability to sell its goods and services in domestic and international markets at a price/quality that is attractive in those markets.

Question 56

What factors can influence international competitiveness

Answer 56

- unit labour costs - export prices - R & D - infrastructure - labour market flexibility - regulation

Question 57

What is the equation for real exchange rate

Answer 57

noiminal exchange rate x (domestic price level/ foreign price level)

Question 58

What is an effective exchange rate

Answer 58

it shows the strength of a sterling relative to a weighted average of exchange rates

Question 59

What is a unit labour cost

Answer 59

the average cost of labour per unit of output that is produced

Question 60

What determines unit labour costs

Answer 60

- rate of change of wages - rate of change of productivity

Question 61

What are the benefits of being internationally competitive

Answer 61

- improved living standards - economic growth - job creation - attracts FDI - innovation

Question 62

What are the drawbacks of being internationally competitive

Answer 62

- trade conflicts - dependency on export markets - labour market pressures - exchange rate issues