Trade + World Economy

• What is absolute advantage in production?

  Producing with fewer resources and lower cost
• What is comparative advantage?

  Producing at a lower opportunity cost than another
• If Norway specializes in oil, what does it trade for?

  Goods and services it cannot produce
• What does the comparative advantage diagram illustrate?

  • Production capabilities of two countries
  • Opportunity costs of producing goods
  • Absolute advantage in production
• Why should Country B produce wheat?

  It has a lower opportunity cost
• What does the gradient of the PPF represent?

  Opportunity cost of production
• If Country A increases wheat production by 5 units, what does it give up?

  3 units of cars

  
• What are the assumptions of comparative advantage theory?

  • Assumes a perfectly competitive market
  • Full benefits of specialization may not occur
  • Does not consider exchange rates
• What is a limitation of full specialization?

  It can lead to structural unemployment
• How has Vietnam developed its advantage in coffee production?

  Increased market share from 1% to 20%
• Why might comparative advantage be considered less relevant today?

  • Countries produce a wide variety of goods
  • Limited specialization due to technology advancements
  • Global trade market is more complex
• How has global trade changed since WW2?

  It has increased significantly.
• What factors have contributed to changes in global trade patterns?

  Emerging markets, trading blocs, and former communist nations
• What is the effect of trading blocs on trade creation?

  They create trade between member countries.
• What is a consequence of protectionist barriers imposed by trading blocs?

  Trade is diverted from non-member countries.
• What has deindustrialisation in the UK led to?

  Decline in the manufacturing sector.
• Where has the production of manufactured goods shifted to?

  Countries like China.
• What has been the focus of the UK economy after deindustrialisation?

  More focus on services.
• What has happened to the share of world trade for China and India?

  It has increased significantly.
• What has the collapse of communism allowed?

  More countries to participate in world trade.
• What trade relationship has China maintained with the US?

  China has run a trade surplus.
• What has happened to the US trade deficit with China since 2006?

  It has narrowed.
• What change has China planned for its economic growth model?

  From export-led growth to domestic consumption.
• What does the theory of comparative advantage assume?

  A perfectly competitive market.
• What is a potential downside of full specialization according to comparative advantage?

  It can lead to structural unemployment.
• What does comparative advantage not consider regarding production costs?

  The exchange rate between countries.
• Which country is the largest coffee supplier to the UK?

  Vietnam
• How has Vietnam's market share in coffee production changed?

  Increased from 1% to 20%.
• What limitation does the comparative advantage model have regarding the global trade market?

  It simplifies the market to two countries.
• Why might comparative advantage be considered less relevant today?

  Countries produce a wide variety of goods.
• How has technology impacted comparative advantage?

  It has reduced the need for specialization.
• What are the key factors that have changed global trade patterns since WW2?

  • Increase in trading blocs
  • Rise of emerging markets (China, India)
  • Greater participation from former communist nations
• What are the strengths and weaknesses of the theory of comparative advantage?

  Strengths:

  • Explains trade patterns based on specialization
  • Encourages efficient resource allocation

  
  

  Weaknesses:

  • Assumes perfect competition
  • Ignores exchange rates
  • Can lead to structural unemployment
• How has Vietnam's role in global coffee production evolved?

  • Largest coffee supplier to the UK
  • Market share increased from 1% to 20%
  • Became one of the world's largest coffee producers
• What does the terms of trade measure?

  Volume of imports per unit of exports
• How is the terms of trade calculated?

  Index price of exports over index price of imports
• What does a terms of trade above 100 indicate?

  Improving terms of trade
• What does a terms of trade of 95.83 mean for an economy?

  Fewer imports per unit of exports
• What factors influence a country's terms of trade?

  • Globalisation impacts prices of invisibles vs. visibles
  • Price elasticity of demand for exports vs. imports
  • Exchange rate appreciation
  • Protectionist measures
  • Population size
• How has globalisation affected the price of invisibles compared to visibles?

  Invisibles are less impacted than visibles