4.1 Benefits of International Trade (DP IB Economics: HL): Flashcards
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Define international trade.
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Cards in this collection (25)
Define international trade.
International trade is the exchange of goods and services between countries through exports and imports.
Define free trade.
Free trade is international trade that takes place when there is no government intervention, such as quotas or taxes, to reduce or limit trade.
How does the greater choice from free trade affect living standards?
Greater choice gives access to a wider variety of goods and services, which improves the standard of living.
With international competition, prices , giving households the ability to buy more.
With international competition, prices fall, giving households the ability to buy more.
True or False?
Free trade prevents the most efficient firms from emerging.
False.
International competition allows the most efficient firms to emerge, which improves the use of global resources.
Why can rising exports lead to economic growth?
Exports are a key component of GDP for many countries, so an increase in exports can lead to economic growth.
How does the international cooperation required for trade benefit countries?
It helps countries build better relationships, which leads to lower levels of hostilities.
When the world price is above the domestic equilibrium price, what happens to the excess domestic supply?
When the world price is above the domestic price, the excess domestic supply is available for export.
True or False?
When the world price lies above the domestic price, domestic supply contracts.
False.
The higher world price incentivises domestic producers to increase output, so domestic supply extends while domestic demand contracts.
When the world price is below the domestic price, the excess domestic demand is met through .
When the world price is below the domestic price, the excess domestic demand is met through imports.
When the world price is below the domestic price, why does domestic supply contract?
Some domestic firms cannot compete with the lower world price, so domestic supply contracts.
Define comparative advantage.
Comparative advantage, developed by David Ricardo in 1817, states that a country should specialise in the goods or services it can produce at the lowest opportunity cost.
Define absolute advantage.
Absolute advantage occurs when a country can produce a product using fewer factors of production than another country.
True or False?
A country with an absolute advantage in a good must also have a comparative advantage in it.
False.
A country may have absolute advantage but still not have comparative advantage; it should produce the goods in which it has comparative advantage.
On a PPC diagram, how is a country's absolute advantage shown?
A country has an absolute advantage when its PPC shows it can produce more of both products than the other country.
Countries with abundant natural resources may gain a comparative advantage in industries that those resources.
Countries with abundant natural resources may gain a comparative advantage in industries that utilise those resources.
How can a country's labour force be a source of comparative advantage?
A skilled workforce in specific industries, or lower labour costs in labour-intensive industries, can provide a comparative advantage.
How do economies of scale create a comparative advantage?
Spreading fixed costs over a larger output reduces per-unit costs, letting firms offer competitive prices in the global market.
One flawed assumption of comparative advantage theory is that transport costs are .
One flawed assumption of comparative advantage theory is that transport costs are zero.
How can government policies influence a country's comparative advantage?
Policies such as trade agreements, subsidies, tax incentives and intellectual property protections can help industries develop and compete in the global market.
Using opportunity costs, how do you identify the good a country should specialise in?
A country should specialise in the good for which it gives up fewer units of the other good, that is, the lower opportunity cost.
True or False?
The theory of comparative advantage accounts for the negative externalities of production.
False.
The theory ignores the negative externalities of production, which can significantly worsen quality of life in towns, cities and countries.
What are the gains from trade once countries specialise?
Specialisation increases the volume of production, so excess output can be exported while goods not produced domestically are imported.
Why can specialisation under comparative advantage create over-dependence?
Specialisation creates a dependence on other countries that generates vulnerability, such as over-dependence on Russian gas in a time of war.
Why might comparative advantage lead to structural unemployment?
As countries specialise, certain industries shut down and displaced workers may not move into other occupations, raising long-term unemployment.
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