work sheet for intl. trade

Name ___________________

Block_________

S21: Why Do Countries Trade Objectives Based Review

1. Objective 1: Define international trade.

International trade is the exchange of goods and services between countries.

2. Objective 2: Identify and explain the gains from trade:

1	Lower prices	Allows consumers to buy goods and services at lower than domestic price.
2	Greater choice	IT enables consumers to have a greater choice of products
3	Differences in recourses	It allows access to resources a country may lack or choose not to exploit.
4	Economies of scale	When there is international trade there is a larger market thus level of prod. will increase
5	Increased competition	Increased competition leads to greater efficiency
6	More efficient allocation of resources	w/o gov’t interference
7	Source of foreign exchange	IT enables countries to obtain foreign exchange

3. Objective 3: Define and give examples of specialization and the division of labor.

Specialization occurs whena firm or a country concentrates production on one or a few goods or services

In it theory specialization forms basis for the gains from trade

According to comparative advantage and economies of scale of labor

4. Objective 4: Define, explain, illustrate   and give examples of absolute advantage. (HL)

Define Absolute Advantage: When a country can produce more of a product than another country using fewer resources.

Explain the theory of absolute advantage: The theory of absolute advantage states that if a country specializes and exports a product in which it has an Absolute Advantage in production the result is an increase in production and consumption of that product.

Illustrate reciprocal absolute advantage and total absolute advantage on a graph.

Reciprocal AA                                                Complete AA

 

Give examples of absolute advantage:

5. Objective 5: Define, explain, illustrate and give examples of comparative advantage.

Define comparative advantage:

If a country can produce a good at a lower opp. cost than another country

Explain the theory of comparative advantage:

The theory of Comparative Advantage demonstrates that as long as opportunity cost are different between countries then if they specialize in the product in which they have a lower opportunity cost in producing and trade for the other product then both countries can consume beyond their PPC.

Illustrate comparative advantage on a graph. Also illustrate the one situation when countries would not benefit from trade.

 

Give examples of comparative advantage:

6. Objective 6: Calculate opportunity costs to identify comparative advantage.

	Cotton	Cars
Egypt	300	100
EU	500	200

Who has the absolute advantage in producing cotton? Cars?

Cotton- EU

Cars- Eu

Who has the comparative advantage in producing cotton? Cars?

Cotton- Egypt

Cars- EU

Suggest a favorable rate of exchange:

1/0.35=2.86

Cotton 0.35

Cars=2.86

Illustrate the gains from trade on a graph:

 

Objective 7: Explain the limitations of comparative advantage theory.

1	Perfect knowledge	It is assumed there is perfect knowledge
2	Transport costs	assumed there is no transport costs
3	2 countries producing 2 goods	assume that there are only 2 economies producing 2 goods
4	Economies and diseconomies of scale	assumed that costs do not change with economies or diseconomies of scale
5	Identical goods	goods traded are assumed to be identical
6	Factors of production	factores of production stay in country
7	Free trade	factors of production stay in country

8. Objective 8: Describe the objectives and functions of the World Trade Organization.

Define WTO:

The World Trade Organization (WTO) deals with the global rules of trade between nations. Its main function is to ensure that trade flows as smoothly, predictably and freely as possible.

Aims of the WTO:

Increase intl. trade by lowring trade barriers and providn a forum for negotioants

Functions of the WTO:

-admin. wto trade agreements

 - be a forum for negotiation

 - handle trade disputes

 - monitor trade policies

 - provider assistence and training for developing copuntries

 - coop with other countries