30/08/15
Lesson 1: Why do countries trade?
Learning Objective: I can identify and explain the gains from trade.
DA: What are the benefits of international trade?
International trade is the exchange of goods and services between countries.
Benefits of international trade:
1. Lower prices
DA: What are the benefits of international trade?
International trade is the exchange of goods and services between countries.
Benefits of international trade:
1. Lower prices
- Consumers are able to buy less expensive products and producers are able to purchase less expensive raw materials/semi manufactured goods.
- Prices may be lower due to access of natural resources.
- Differences in the quality of labor.
- Differences in the quality of capital/levels of technology.
- Domestic and international choice.
- Import the commodities they lack.
- Ex, Singapore has to import almost every natural resource, even water. However, Singapore is able to export high levels of manufactured goods/services in order to fund their imports.
- With international/domestic the size of the market will increase, thus demand will increase. Level and size of production will also increase.
- Increased levels of production should provide scope for economies of scale to be achieved, production should become more efficient.
- Specialization will increase, firms are large, individuals may specialize in specific tasks.
- Countries may specialize in the production of certain commodities, such as chemicals, there will be cost benefits to be gained from acquiring experience and expertise. This is known as moving down the "learning curve" (long-run average cost curve).
- Export industries should become more competitive, reduction in long-run average costs.
- Greater efficiency resulting in less expensive goods/services. Improvement of quality/variety as well.
- Trade without government intervention will lead to countries that are best at producing certain goods/services will produce them; they will be able to produce these goods/services at the lowest cost and take advantage of their efficiency.
- If a country exports products then that country will be paid in foreign currency.
- Especially important for developing countries which don't have convertible currency.
HL: Comparative Advantage Theory
1. Absolute advantage: A country is said to have an absolute advantage in the production of a good if it can produce it using fewer resources than another country.
France has an absolute advantage in the production of both goods. But in terms of comparative advantage:
France only has to give up 4/3 kilos of cheese to produce a litre of wine. Poland only has to give up 1/3 litre of wine to produce a kilo of cheese. This concept can be illustrated graphically with 21.1. Although France has an absolute advantage, the comparative advantage exits where the distance between the production possibilities is greatest (a). The comparative advantage for the less efficient producer exits where the distance between the production possibilities is least (b). ACTIVITY-Based on the data and diagram, identify which country has the absolute and or comparative advantage: |
|
Additional Practice, download the document below: HW if not completed in class.
additional_practice.docx | |
File Size: | 19 kb |
File Type: | docx |
WTO Handout:
wto_handout.docx | |
File Size: | 15 kb |
File Type: | docx |