Globalisation and trade
Comparative advantage, free trade and protectionism, the balance of payments, exchange rates, multinational firms, global value chains and the WTO: reading a country's trade and its effects.
- 30 cards
- 4 topics
- Free
The outline, topic by topic
Each topic is weighted the way the exam weighs it.
- Concepts
- Questions
- Sort and link
- The numbers
A few cards from the deck
Comparative advantage: what is it?
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The ability to produce a good at a lower opportunity cost than a partner, even without being the best at it.
Ricardo shows that each country gains by specialising where its opportunity cost is lowest, even when one of the two is more efficient at everything.
England makes a unit of cloth in 100 hours and a unit of wine in 120 hours; Portugal, in 90 and 80 hours. Why should Portugal specialise in wine?
- A unit of wine costs it 0.89 units of cloth, against 1.2 in England
- A unit of wine costs it 1.13 units of cloth, against 0.83 in England
- A unit of cloth costs it 0.89 units of wine, against 1.2 in England
- A unit of cloth takes it 10 more hours than it takes England
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A unit of wine costs it 0.89 units of cloth, against 1.2 in England
Portugal is more efficient in both goods (80 hours against 120 for wine, 90 against 100 for cloth), but what matters is opportunity cost: a unit of wine there costs 80 / 90 ≈ 0.89 units of cloth, against 120 / 100 = 1.2 in England. The inverse ratio, 90 / 80 ≈ 1.13, is the cost of cloth in wine. Portugal has the comparative advantage in wine; England in cloth.
The coverage ratio compares … with …: at 100%, the trade balance is in equilibrium.
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The coverage ratio compares exports with imports: at 100%, the trade balance is in equilibrium.
Above 100% the country exports more than it imports (surplus); below, it imports more than it exports (deficit).
Protectionism: what is it?
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A policy that shields domestic producers from foreign competition through customs duties, quotas, standards or subsidies.
It stands against free trade, which removes these barriers. Customs duties are tariff measures; quotas, standards and subsidies are non-tariff measures.