A-Level - The reasons for international trade

What must exist for international trade to occur?

• A. an absence of taxes on imports

• B. an absence of transport costs

• C. equal opportunity cost ratios in all countries

• D. limited mobility of factors of production between countries

Why might Country X, which has a comparative advantage in producing rice, import rice?

• A. Demand for rice in Country X exceeds the maximum quantity of rice that Country X can produce.

• B. Other countries are imposing a tax on imports of rice from Country X.

• C. The supply of rice in Country X is of a higher quality than that produced in other countries.

• D. The cost of transporting rice is low.

What would be likely to cause an unfavourable movement in a country’s terms of trade?

• A. a decrease in the price of exports relative to the price of its imports

• B. a decrease in the volume of exports relative to the volume of imports

• C. an increase in a surplus on the current account of the balance of payments

• D. an increase in a surplus on the government’s budget

A government decides to encourage specialisation based on comparative advantage.

Which condition is necessary for this policy decision to be beneficial?

• A. dissimilar tastes in other countries

• B. fixed exchange rates

• C. mobile factors of production within a country

• D. similar factor endowments as other countries

What is a potential disadvantage of an unfavourable movement in the terms of trade?

• A. Exports become less price competitive.

• B. Each export will be able to buy a smaller value of imports.

• C. The general price level will fall.

• D. The government budget balance will move into deficit.