Comparative Advantage and TNCs Quiz
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Questions and Answers

What does the theory of comparative advantage suggest?

  • Countries find specialization mutually advantageous if their opportunity costs of production are different. (correct)
  • All countries should produce goods at the same cost.
  • Countries will benefit more from increasing production of every good.
  • TNCs always prioritize local production over imports.

    • Absolute advantage occurs when a country can produce a good more cheaply than another country in absolute terms.

    True

    What may happen to a country's economy when TNCs leave due to a loss of comparative advantage?

    Structural unemployment and reduced growth

    Comparative advantage exists when a country can produce a good more cheaply relative to other goods produced, even if it has an _____ advantage in all goods.

    <p>absolute</p> Signup and view all the answers

    Match the country with its comparative advantage based on the examples given:

    <p>Spain = Umbrellas UK = Cars USA = Both goods Spain (when specialized) = Cars and some Umbrellas</p> Signup and view all the answers

    What can be a knock-on benefit of TNCs operating in a country?

    <p>They can bring world-class management techniques and technology.</p> Signup and view all the answers

    What has happened to wages for low-skilled workers in developed countries due to international competition?

    <p>Wages have fallen or growth has reduced</p> Signup and view all the answers

    Comparative cost advantages remain static over time.

    <p>False</p> Signup and view all the answers

    What is one potential negative impact of TNCs supporting unpopular regimes?

    <p>Political instability</p> Signup and view all the answers

    TNCs always provide great working conditions in developing countries.

    <p>False</p> Signup and view all the answers

    What is one potential negative impact of increased migration on wages for local workers?

    <p>Lower wages</p> Signup and view all the answers

    The increase in world production has led to increased demand for ______, which negatively impacts the environment.

    <p>raw materials</p> Signup and view all the answers

    Match the following stakeholders with their impacts from globalization:

    <p>Workers = Job losses in manufacturing Firms = Access to larger markets Government = Higher tax revenue Environment = Increased emissions</p> Signup and view all the answers

    Which of the following factors contributes to increased inequality in wages?

    <p>High demand for high-skilled workers</p> Signup and view all the answers

    The presence of TNCs in a country can lead to an increase in tax avoidance.

    <p>True</p> Signup and view all the answers

    What is one way globalization allows the world to address climate change?

    <p>Sharing ideas and technology</p> Signup and view all the answers

    What is the primary reason for protecting an infant industry?

    <p>To allow the industry to build a reputation and cover sunk costs</p> Signup and view all the answers

    Job protection is a concern for governments when allowing imports.

    <p>True</p> Signup and view all the answers

    What is meant by dumping in international trade?

    <p>Selling surplus goods at very low prices in other markets.</p> Signup and view all the answers

    In China, tariffs are placed on stainless steel tubes from the _____ and _____ to prevent dumping.

    <p>EU, Japan</p> Signup and view all the answers

    Which of the following is NOT a reason for restrictions on free trade?

    <p>Enhancement of global trade benefits</p> Signup and view all the answers

    Match the following reasons for trade restrictions with their descriptions:

    <p>Infant industry = Protection needed for new industries Job protection = Safeguarding domestic employment Dumping = Selling below market value in foreign countries Terms of trade = Impact on trade balances due to import costs</p> Signup and view all the answers

    Government intervention generally leads to greater efficiency in infant industries.

    <p>False</p> Signup and view all the answers

    What argument suggests that domestic producers need protection from foreign competitors with lower production costs?

    <p>Protection from unfair competition</p> Signup and view all the answers

    What economic concept explains how world output can be increased by countries specializing in what they are best at producing?

    <p>Comparative advantage</p> Signup and view all the answers

    Trade generally leads to an increase in consumer choice and welfare.

    <p>True</p> Signup and view all the answers

    What is one disadvantage of over-dependence on trade?

    <p>It can lead to economic vulnerability if export prices fall or imports are restricted.</p> Signup and view all the answers

    Specialization and trade can result in _____, where jobs are lost to more efficient foreign firms.

    <p>structural unemployment</p> Signup and view all the answers

    Match the following terms with their definitions:

    <p>Comparative advantage = Ability to produce goods at a lower opportunity cost Economies of scale = Reduction in cost per unit due to increased production Structural unemployment = Job loss due to foreign competition Sovereignty loss = Diminished control over national policies due to trade agreements</p> Signup and view all the answers

    One potential environmental downside of increased trade is:

    <p>Deforestation</p> Signup and view all the answers

    Joining trading blocs like the EU can lead to a loss of national sovereignty.

    <p>True</p> Signup and view all the answers

    What is a potential benefit of a current account surplus for a competitive country?

    <p>Ability to invest overseas</p> Signup and view all the answers

    Name one benefit of trade that fosters innovation.

    <p>Increased competition</p> Signup and view all the answers

    A competitive economy is likely to decrease wages due to increased demand for labor.

    <p>False</p> Signup and view all the answers

    What can lead to a rise in the exchange rate in a competitive economy?

    <p>current account surplus</p> Signup and view all the answers

    Developing countries may benefit from _____ due to lower costs of labor and materials.

    <p>export led growth</p> Signup and view all the answers

    Match the impact of competitiveness with its description:

    <p>Current Account Surplus = Opportunities for overseas investments Employment Increase = Rise in the demand for labor Economic Growth = Improvements from efficiency and investment Trade Barriers = Protection for less competitive countries</p> Signup and view all the answers

    What is the primary goal of competitive devaluation?

    <p>To boost exporting industries</p> Signup and view all the answers

    A weaker currency always leads to an improvement in the balance of payments.

    <p>False</p> Signup and view all the answers

    What condition must be met for a devaluation to positively impact the trade balance?

    <p>The sum of the price elasticities of imports and exports must be more than one.</p> Signup and view all the answers

    The _________ shows how the current account will worsen before it improves after a currency devaluation.

    <p>J-curve</p> Signup and view all the answers

    What is a possible negative effect of competitive devaluation?

    <p>Inflation</p> Signup and view all the answers

    Match the following terms with their corresponding effects:

    <p>Competitive devaluation = Boost exports Inflation = Rises due to more expensive imports J-curve = Initial worsening of the current account Increased foreign investment = Cheaper currency for investment</p> Signup and view all the answers

    Which of the following is NOT a reason for a country to engage in competitive devaluation?

    <p>To strengthen their currency</p> Signup and view all the answers

    What impact does a weaker exchange rate have on aggregate demand (AD)?

    <p>It increases AD.</p> Signup and view all the answers

    Study Notes

    International Economics

    • Globalisation is the increasing interdependence of countries.
    • It involves the geographic dispersion of industrial and service activities, including research and development, sourcing of inputs, and production and distribution.
    • Globalisation involves cross-border networking of companies, e.g., through joint ventures and asset sharing.
    • It leads to the integration of local, regional, and national economies into a single international market, with movement toward free trade of goods and services, along with free movement of labour and capital, and free technology exchange.

    Factors Contributing to Globalisation

    • Improvements in transport infrastructure and operations facilitate quick, reliable, and cheap global production.
    • Advancements in IT and communication technologies enable businesses to operate across the globe.
    • Trade liberalisation and reduced protectionism have lowered trade costs since 1945.
    • The breakdown of the Soviet bloc and the opening of China expanded global business opportunities.
    • International financial markets provide funding for global trade.
    • Multinational corporations (TNCs) are major drivers of globalisation, seeking to maximize profits through exploiting low-cost labour and access to larger markets.

    Impacts of Globalisation

    • Consumers: Wider variety of goods and lower prices due to comparative advantage and lower production costs in other countries.
    • Workers: Some gain from increased job opportunities, particularly in developing countries; others lose jobs in developed countries due to manufacturing relocation. Increased competition can lead to lower wages for some workers.
    • Producers: Larger markets and reduced risk of market downturns, enabling exploitation of comparative advantages and higher profits for successful firms but can also lead to the loss of competitiveness for struggling domestic producers.
    • Governments: Increased tax revenues from TNC activity but also the risk of tax avoidance.
    • Environment: Increased demand for raw materials and production leads to environmental pressures.

    Specialisation and Trade

    • Comparative Advantage: Countries should specialize in producing goods where they have a lower opportunity cost compared to other countries to create greater efficiency in the global economy.
    • Absolute Advantage: A country has an absolute advantage if it can produce a good more cheaply in absolute terms than another country.
    • A country might choose to specialize in one good and trade for another - it can be mutually advantageous for countries to specialize if opportunity costs are different from one another.

    Pattern of Trade

    • Comparative advantage shapes trade patterns, driving trade between countries with differing cost advantages.
    • Developing countries have increasingly exported manufactured goods due in part to lower labor costs compared to developed countries.
    • Trends in trade patterns are influenced by deindustrialization and the rise of emerging economies.
    • Trading blocks and agreements affect trade patterns, with specific countries becoming more integrated.

    Terms of Trade

    • Terms of trade measures the rate at which a country's exports exchange for its imports.
    • Factors influencing a country's terms of trade involve: changes in export prices, changes in import prices; and the demand/supply of exports and imports.

    Trading Blocs

    • Trading blocs integrate countries through reduced tariffs, quotas, and other trade barriers.
    • Types of trading blocs include preferential trading areas, free trade areas, customs unions, and common markets.

    International Competitiveness

    • Relative unit labor costs measure the cost of employing workers per unit of output.
    • Relative export prices assess the price of a country's exports relative to those of its trading partners.
    • Factors influencing competitiveness include exchange rates, productivity, regulation, investment, and taxation.

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    4.1 International Economics Detailed Notes PDF

    Description

    Test your understanding of the theory of comparative advantage and its impact on economies, particularly with the presence and absence of transnational corporations (TNCs). The quiz covers key concepts, examples, and potential effects on workers and economic conditions in both developed and developing countries.

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