Economics Department
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Economics Department |
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Worksheet: <SPAN lang=EN-US>why do countries trade?</SPAN>
<SPAN lang=EN-US>Free Trade</SPAN><SPAN lang=EN-US> can be shown to lead to increases in economic welfare for consumers and producers. </SPAN> <SPAN lang=EN-US>There are some goods that we cannot produce in this country because of inappropriate resources and a unsuitable climate. We need to export other commodities to finance imports of these items.<O:P> </O:P></SPAN> <SPAN lang=EN-US>Trade can lead to an improvement in overall economic welfare if countries specialize in the products in which they have a production advantage.
1) Use PPF theory to show how trade can increase world economic welfare (4 marks) 2) Explain the same argument using the principle of comparative advantage. (4 marks)<O:P></O:P></SPAN>
<SPAN lang=EN-US>International trade allows businesses to exploit scale economies by operating in much larger markets - the fifteen member nations of the European Union for example have over 450 million consumers with a massive total purchasing power. Economies of scale lead to lower average costs of production that can be passed onto consumers.<O:P>
3) What is meant by 'economies of scale? (3 marks) 4) Analyse the factors that will determine whether or not they will be passed on to consumers in the form of lower prices. (5 marks) </O:P></SPAN>
<SPAN lang=EN-US>International competition</SPAN><SPAN lang=EN-US> stimulates higher efficiency - particularly for domestic monopolies who would otherwise face little real competition. </SPAN>
<SPAN lang=EN-US>For example, British Steel faces stiff competition from overseas steel producers and is effectively a price-taker in the world market.<O:P> It has suffered from the effects of a downturn in the global steel industry and the effects of a strong exchange rate.</O:P> For example it now takes a worker 3.3 hours to produce a tonne of liquid steel, compared to 14.3 hours in 1979. </SPAN>
<SPAN lang=EN-US>Trade enhances consumer choice and international competition between suppliers helps to keep prices down<O:P> </O:P></SPAN>
<SPAN lang=EN-US>Trade in ideas stimulates product and process innovations that generates better products for consumers and enhances the overall standard of living.<O:P> </SPAN>
<SPAN lang=EN-US>Generally, those countries that have opened up their markets to greater international trade have experienced an increase in their average growth rate in the long run. Recent work by Maurer on the economic impact of trade liberalization has shown a more rapid pace of growth post-liberalization. See some of the evidence from the table below. </SPAN>
5) Summarise the findings of the table. (4 marks) 6) Using economic theory to assist, explain why this pattern might hold. (4 marks) 7) Describe the main forms of protectionism (Tariffs, quotas, administrative barriers) (4 marks)
8) Using a supply and demand diagram, analyse the impact of an increase in tariffs on: (i) Imports (ii) Exports (iii) Consumer Surplus (iv) Economic welfare (8 marks) 9) If the advantages of free trade are so great, why do so many countries seek to protect their industries? (9 marks)
(45 marks)
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