commerce

What is free trade?

• the absence of government intervention of any kind in international trade so that trade takes place without any restrictions (barriers between firms or governments of different countries)

• when countries exchange goods freely without a price so that each country can benefit from the other

• a type of global barter economy when the price of goods are determined at a set level and then exchanged

• a situation where countries trade but governments set restrictions to ensure that local businesses are not negatively impacted

Which is NOT a benefit of free trade for firms?

• Increased competition - drives greater efficiency in production

• Access to larger markets - expansion is the size of the market can expand sales of the firm

• Economies of scale in production - access to larger markets allows firms to grow beyond the limits of national boundaries, produce more output and take advantage of economies of scale

• Profits competed away - with the rise of competition domestic firms abnormal profits may be competed away

What is a BENEFIT of free trade for FIRMS? There are TWO.

• Increased competition - drives greater efficiency in production

• Resource degradation - as firms compete with each other for resources it may degrade the resources available to firms

• Economies of scale in production - access to larger markets allows firms to grow beyond the limits of national boundaries, produce more output and take advantage of economies of scale

• Profits competed away - with the rise of competition domestic firms abnormal profits may be competed away

What are BENEFITS of free trade for CONSUMERS? There are TWO.

• Lower price for consumers - increased competition and greater efficiency leads to lower prices

• Economies of scale - firms can expand and experience decreasing average costs of production

• Greater choice for consumers - countries can import a larger variety of goods and services, possibly higher quality

• Profits competed away - with the rise of competition domestic firms abnormal profits may be competed away

What are BENEFITS of free trade for COUNTRIES? There are TWO.

• Specialisation - countries begin to use resources to specialise in production of these G&S, produce greater quantity at lower cost

• Unequal trade - firms that have greater natural benefits to trade may overpower smaller nations

• Stealing intellectual property - domestic producers are often able to copy the products and sell them as knock-offs without fear of any legal repercussions

• Growth - increased competition, efficiency in production, economies of scale and specialisation drives economic growth

What is true about comparative advantage?

• It was first thought out by the mathematician David Rimaro

• A country can produce at a lower opportunity cost than another country.

• A country can produce at a higher opportunity cost than another country.

• Comparative advantage assumes that costs change and there is not a constant return to scale.

The ability of one person or nation to produce more of a good than another person or nation

• Comparative Advantage
• Absolute advantage
• exports
• protectionism 

Is there a country who has a absolute advantage in the production of cloth?

• Yes, China.

• Yes, India.

• No

According to the law of comparative advantage, a country should 

• Specialize and export goods with the lowest production cost
• Specialize and export goods with the lowest opportunity cost
• Specialize and export goods with the lowest average cost
• Specialize and export goods with the highest opportunity cost

Based on this table, if these two countries trade with each other, what should each country make?

• South Korea makes all of the TV sets and Japan makes all the cars

• South Korea makes all of the cars and Japan makes all of the TV sets

• South Korea makes all TV sets and Japan gives up 50 TV sets in favor of 25 cars.

• Japan makes all of the cars and South Korea shifts half of its car production to TVs