International Trade and Comparative Advantage

With the help of a formula, explain two reasons for an improvement in the terms of trade and consider the extent to which an improvement in the terms of trade will benefit an economy.

Assess the extent to which the consequences of free trade are always positive for an economy.

The terms of trade index for an economy changed from 105 to 110 in a given year.

Explain two likely reasons for this change and consider the extent to which the change is likely to benefit the current account of the balance of payments of this economy.

Assess whether government policy can influence an economy’s comparative advantage in a good or service.

Explain two possible causes of a change in the terms of trade in an economy and consider which of these causes is likely to be more important for low-income countries.

Assess the extent to which different tools of protection can impact on the terms of trade in an economy.

Explain the difference between the terms of trade and the balance of trade in goods and consider whether an economy should be more concerned about its terms of trade than its balance of trade in goods.

Assess whether a rise or a fall in the terms of trade will benefit the macroeconomic performance of an open economy that is heavily dependent on international trade.

Explain how a free trade area differs from a customs union and explain two reasons why countries move towards tariff-free trade.

Discuss the view that the gains from tariff-free trade are greater for countries who are net importers than for countries who are net exporters.

Explain why the theory of comparative advantage may not give a true account of the benefits of free trade.

In April 2018, the United States (US) government threatened to impose tariffs of 25% on a wide range of imports from China including steel, technological products, medicines and household goods such as washing machines. In turn, China threatened to retaliate with the same proposed tariff on imports from the US of soya beans, cars and chemicals.

Discuss whether the US and China could both benefit from the imposition of tariffs on goods such as those identified.

State how the terms of trade are measured, and explain three possible causes of the fall in China’s terms of trade shown above.

Discuss whether a rise in the terms of trade or a fall in the terms of trade is more likely to be of benefit for an economy.

Describe what is meant by a rise in an economy’s terms of trade. Outline how a change in an economy’s exchange rate and its domestic price level might each cause this to come about.

Discuss whether a rise in an economy’s terms of trade is likely to be of overall benefit to that economy.

Explain what might cause a favourable movement in an economy’s terms of trade.

Discuss whether overall a favourable movement in an economy’s terms of trade would be likely to have positive or negative effects on the economy.

Use production possibility diagrams to explain how specialisation and international trade can improve the standard of living of consumers in a country.

Discuss whether protection of domestic industries can ever be justified, given the benefits of specialisation and trade.