2.4.3 International trade

What is specialisation?

When workers or countries focus on a specific task or product to increase efficiency and output.

Who explained the benefits of the division of labour?

Adam Smith in The Wealth of Nations (e.g., pin factory example).

Advantages of specialisation?

Higher output and quality, greater variety of goods, economies of scale, increased competition, lower costs.

Disadvantages of specialisation?

Repetitive work lowers motivation, structural unemployment, less variety for consumers, higher worker turnover.

What is absolute advantage?

When a country produces more of a good with the same resources.

What is comparative advantage?

When a country can produce a good at a lower opportunity cost than another.

Advantages of international trade?

Greater world output, lower costs, increased variety, outward shift of PPF.

Disadvantages of international trade?

Overuse of resources, dependence on one export, vulnerable to price/weather shocks.

What is a free trade area?

Countries trade freely with each other, no barriers (e.g., NAFTA, EFTA).

What is a customs union?

Free trade among members plus a common external tariff (e.g., EU).

What is a common market?

Customs union + free movement of labour and capital (e.g., EU originally).

What is a monetary union?

Shared currency and monetary policy (e.g., Eurozone).

Conditions for optimal currency zone?

Real convergence, labour mobility, flexible wages/prices, fiscal transfers.

What is trade creation vs trade diversion?

Trade creation = imports shift to low-cost producers inside bloc.

Trade diversion = trade shifts from more efficient outside producers to less efficient inside producers.

Benefits of trading blocs?

Reduced transaction costs, economies of scale, enhanced competition, migration to fill labour shortages.

How does free trade affect growth?

Increases GDP, raises living standards, encourages specialisation and efficiency.

What are visibles and invisibles in trade?

Visibles = physical goods (e.g., cars); Invisibles = services (e.g., tourism, finance).

Impact of cheap imports?

Lower prices, increased consumer choice, lower inflation, higher disposable income; but can cause domestic job losses and dependence on other countries.