Unit 4.1 - Benefits of International Trade

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Every term and definition, free to read. Hit study above to practice them as flashcards.

A condition of self-sufficiency where a country does not participate in international trade.HL

autarky

A situation where one country can produce more of a good or service than another country with the same resources.HL

absolute advantage

State the formula: Opportunity cost (Australia): 1 timberHL

Opportunity cost (Australia): 1 timber = 2 cattle From Australia’s linear PPC, producing one unit of timber requires giving up two units of cattle.

State the formula: Opportunity cost (Brazil): 2 timberHL

Opportunity cost (Brazil): 2 timber = 1 cattle (or 1 cattle = 2 timber) From Brazil’s linear PPC, producing one unit of cattle requires giving up two units of timber.

gains from tradeHL

The increase in total output and benefits that countries achieve when they specialize in producing goods or services in which they have a comparative advantage, leading to more efficient resource allocation and higher overall production.

tradeHL

The exchange of goods and services between countries, which allows nations to benefit from specialization and absolute advantage, contributing to their economic prosperity and wealth accumulation.

The available quantity and quality of production resources in a nation, including natural assets and workforce skills.

factor endowment

The currency earned from exports that allows for international payments.

Foreign exchange

The exchange of goods and services between nations.

international trade

The income generated by a nation from selling products and services to customers located outside its borders.

foreign exchange earnings

comparative cost advantage

A situation where a country can produce a good or service at a lower opportunity cost than another country, making it advantageous for international trade as it allows for the export of goods where the country holds this advantage.

division of labour

The allocation of different tasks to different workers or groups, which increases efficiency and productivity by allowing workers to specialize in specific activities, often seen in the context of international trade.

domestic price

The price of a good or service within a country, determined by the intersection of domestic demand and supply. It influences whether a country will import or export based on comparison with world prices.

efficient resource allocation

The optimal distribution of resources to maximize output and minimize waste, which is promoted by international trade as it encourages countries to produce goods where they have a comparative advantage.

production efficiency

The ability of firms to use resources effectively in production, maximizing output with minimal inputs. This efficiency is crucial for competitiveness, especially in international trade, where firms must innovate and cut costs to meet market demands.

specialization

The process by which individuals or firms focus on a narrow range of products or services, allowing them to operate more efficiently and reduce average costs, which is enhanced by international trade.

trade barriers

Obstacles that countries impose to restrict trade, which can include tariffs, quotas, and regulations. These barriers are often reduced to facilitate international trade and improve resource allocation.

trade protectionism

Government policies designed to protect domestic industries from foreign competition, often through tariffs, quotas, and subsidies. This can lead to inefficiencies in the economy.

world price

The prevailing price of a good or service in the global market, which affects a country's decision to import or export. It is compared to domestic prices to determine trade dynamics.

A situation where one nation can produce a specific output with a lower opportunity cost compared to another nation, sacrificing fewer resources.HL

Comparative advantage

Perfect knowledge (of prices)HL

The assumption that all consumers and producers have complete information about prices, which is unrealistic and affects the functioning of comparative advantage in real-world trade.

Perfect occupational mobilityHL

The assumption that factors of production can be easily transferred between industries without loss of efficiency, which is a limitation of the comparative advantage theory.

Price stability (inflation)HL

The consistency of prices over time, where unstable inflation can harm a country's comparative cost advantages by making exports less attractive to foreign buyers.

bargaining positionHL

The relative strength of a country in negotiations, which can influence the terms of trade and the distribution of gains from trade, leading to unequal benefits among trading partners.

exchange rate fluctuationsHL

Changes in the value of one currency relative to another, which can affect the prices of exports and imports, potentially impacting a country's comparative advantage and trade dynamics.

transportation costsHL

Expenses incurred in moving goods from one location to another, which can impact the comparative advantage of countries by affecting the overall cost of trade.