international trade defo?
exchange of products
Whi does trade take place between?
economic agents of a country
What are static gains of trade?
improvements in allocative and productive effeciency in markets
What are dynamic gains in a market?
the gains in welfare from improved product quality, increased choice and faster and more innovative behaviour
what is free trade?
international trade free from artificial barriers such as import tariffs or quotas
Who came up with comparative advantages?
david ricardo
What is opportunity cost?
measures the cost of any choice in terms of the next best alternative foregone
Opportunity cost formula ?
amount of good B given up / amount of good A produced
When does comparative advantage exist?
- relative opportunity cost of production for a good or service is lower then another country
- a country is relatively more productively effecient than another
What does comparative advantage lead to?
gains from specialisation and trade leading to a more effecient allocation of scarce resources
What is absolute advantage?
occurs when a country can produce a product using fewer resources than another nation
Define comparative advantage?
focuses on when a country has lower relative opportunity cost when it decides to specialise in a particular product
What are the terms of trade?
index of export prices / index of import prices
assumptions behind comparative advantage?
- constant returns to scale
- factor mobility between industries
- no import controls
- low transportation costs
- ignores externalities
what are the key factors determining comparative advantage?
- quantity and quality of natural resources available
- demographics
- rates of capital
- investment in R+D
How does allocative efficiency impact trade?
competition from lower cost import sources drives market price down and reduces monopoly profits
how does productive efficiency impact trade?
specializing and selling in larger markets encourages increasing returns to scale
Dynamic efficiency impact on trade>
open economies may see more innovative buisness who invest more in research and development and also in the human capital of workforce raising productivity
x effeciency impact on trade?
intense competition in markets will provide a discipline on businesses to keep their lower unit costs under control and maintain competitive
What are the dynamic gains from trade>
- gives access to new and cheaper imports
- make domestic economy more productive
- economies of scale
- increased competition and innovation
What are the downsides of international trade?
- transport costs
- negative externalities from production and consumption
- risk of structural unemployment
- rising inequality
- pressure on wages and working conditions
- risks from global external shocks
What does successful trade provide for developing countries?
- foreign currency helping BoP
- injection of demand into circular flow of income
- increased employment
- falling prices for consumers
