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Higher Level
Absolute advantage
Comparative advantage
Where a country is able to produce more of a
Where a country is able to produce a good or
particular good or service than other countries for a service at a lower opportunity cost than another
given amount of inputs
country
...
Factor endowments (natural advantages that
trade if the opportunity cost of production of goods
a country has)
differs
...
Level of technology
Limitations to the theory of comparative
advantage
1
...

2
...

3
...

4
...

5
...
Again,
usually not the case
...
No tariffs or trade barriers; again often not
the case
7
...
A surplus means other countries must have
deficits
...

2
...

3
...
It would make sense to
“invest” the surplus in reducing poverty rather than
in buying overseas assets
...
Expenditure switching policies i
...

switching spending from foreign goods to
domestic goods can be achieved by:
 Protectionism
 Depreciation

A persistent Current Account deficit has a
number of problems:
1
...
This will result in less
economic activity and unemployment
...
A Current Account deficit means imports are
greater than exports
...

This is not necessarily a bad thing unless it persists
into the long term
...
The deficit needs to be financed
...

* By selling domestically owned assets to
foreigners
...

* By using foreign currency and gold reserves

Policies to correct a current account deficit
...
Expenditure switching policies
2
...
Supply sided policies to increase
competitiveness






Disadvantages of using protectionism:
Retaliation
Higher prices for domestic consumers (from
tariffs etc)
Loss of economic efficiency
Loss of other benefits of trade

Disadvantages of using depreciation:
 J curve and Marshall Learner condition
 Imported inflation
 Retailiation
Disadvantages of using Expenditure reducing
policies:
 Higher unemployment and lower economic
growth
...


Trade Creation (advantage of economic
integration)
Joining a customs union leads to trade creation
...

thus trade is created and consumers benefit from
access to lower cost goods
...
Expenditure reducing policies
...

3
...
SSPs include:
Interventionists SSPs
A
...
Investment in new technology
C
...
Industrial policies
Market Based SSPs
A
...
Labour market reform
C
...
More of the world’s scarce
resources are used to produce the same amount of
goods and services
...

If the TOT deteriorates then a given quantity of
exports will buy a smaller quantity of imports than
before
...
Changes in the condition in demand and supply
...
Changes in income
2
...

2
...
Changes in exchange rates
within a country
...
Long run improvement in technology within a
country

Most exports in the long run face elastic demand
...

Most imports in the long run face elastic demand
...

The impact on the Balance of Payment of a change
in the TOT depends upon whether the average
price of exports and volume of exports to move in
the same or opposite direction:
1
...
Higher export prices caused by domestic
inflation (volume decreases and average price
increases therefore whether outcome favourable
for Balance of Payments depends on the PED of
exports)
Impact of deteriorating TOT on developing
countries
1
...

A deterioration in TOT means that the same
amount of exports can buy less and less imports
...

2
...


A deterioration in the TOT in the long term can
lead to a redistribution of income globally
...

Impact of short term fluctuations in TOT on
developing countries
1
...
This affects their income and ability to
plan and invest (as they will be unsure whether
they will be able to repay any bank loan)
...

2
...




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