Differences Between Internal and International Trade
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Questions and Answers

Which currency would primarily be used for goods and services in international trade?

  • Pound Sterling
  • US Dollar
  • Indian Rupee (correct)
  • Euro

What factor is generally greater in international transport compared to domestic transport?

  • Convenience
  • Distance (correct)
  • Speed of delivery
  • Cost of transport

What are trade restrictive practices primarily used for in international trade?

  • To stabilize currency values
  • To reduce imports (correct)
  • To enhance exports
  • To increase competition

Which statement best describes the cost of transporting goods between nations as compared to within one nation?

<p>International transport usually has higher costs involved. (A)</p> Signup and view all the answers

Which of the following currencies is NOT mentioned as being involved in international trade?

<p>Japanese Yen (A)</p> Signup and view all the answers

Why is the cost of transport usually lower for internal trade?

<p>Shorter distances are involved. (D)</p> Signup and view all the answers

What term refers to the methods used to limit or control trading activities in international markets?

<p>Trade restrictive measures (C)</p> Signup and view all the answers

Which of the following currencies might involve different exchange values in international trade?

<p>All of the above (D)</p> Signup and view all the answers

What can influence a decrease in domestic demand?

<p>Change in tastes and preferences (D)</p> Signup and view all the answers

Which of the following statements is true regarding NAFTA?

<p>Mexico is a member of NAFTA. (B)</p> Signup and view all the answers

What is the primary purpose of artificial trade barriers?

<p>To protect domestic industries and regulate foreign investment. (C)</p> Signup and view all the answers

What does product differentiation aim to achieve in international trade?

<p>Attract customers through unique designs (A)</p> Signup and view all the answers

Which factor can lead to a reversal of trade direction?

<p>Higher domestic demand for a product (C)</p> Signup and view all the answers

How do natural barriers impact international trade?

<p>They may restrict trade due to geographical challenges. (B)</p> Signup and view all the answers

What effect do natural physical barriers have on the transport of goods?

<p>They can make transport of goods nearly impossible. (C)</p> Signup and view all the answers

Which of the following factors is considered the fifth factor of production?

<p>Technology (C)</p> Signup and view all the answers

Which factor is NOT considered an artificial trade barrier?

<p>Geographical location (A)</p> Signup and view all the answers

What is a significant issue that can arise due to transport costs in international trade?

<p>Transport costs undermining cost advantages (D)</p> Signup and view all the answers

What does the statement 'free trade is a myth' imply?

<p>Many nations still impose trade barriers despite the concept of free trade. (D)</p> Signup and view all the answers

Which of the following is NOT a characteristic of international trade markets?

<p>Standardized regulations across countries (D)</p> Signup and view all the answers

How does technological development impact nations with cost disadvantages?

<p>It transforms cost disadvantages into cost advantages. (D)</p> Signup and view all the answers

What might lead to a decrease in a nation's export capacity?

<p>An increase in domestic demand. (B)</p> Signup and view all the answers

What role do customs duties play in international trade?

<p>They serve to increase domestic product sales by raising import costs. (B)</p> Signup and view all the answers

Why might countries engage in product differentiation?

<p>To attract international customers (D)</p> Signup and view all the answers

What role does technology play for an agricultural country like India?

<p>It enables them to launch advanced initiatives like unmanned missions. (B)</p> Signup and view all the answers

Which of the following is an example of a natural barrier to trade?

<p>Rivers that can limit transportation routes. (C)</p> Signup and view all the answers

What impacts can government policies have on domestic demand?

<p>Influencing consumer spending habits (A)</p> Signup and view all the answers

How did Ricardo and Heckscher-Ohlin contribute to the understanding of international trade?

<p>By explaining comparative advantage in trade (A)</p> Signup and view all the answers

Which of the following statements about international trading is correct?

<p>Trade barriers can restrict the optimal utilization of productive resources. (A)</p> Signup and view all the answers

What is the relationship between domestic demand and exports?

<p>Domestic demand changes can affect export capacity. (A)</p> Signup and view all the answers

What does technology enable nations to do regarding scarce and abundant factors of production?

<p>Substitute scarce factors with abundant ones. (C)</p> Signup and view all the answers

What is a potential effect of higher income on domestic demand?

<p>It may increase domestic demand, potentially affecting exports. (A)</p> Signup and view all the answers

What does a higher level of production capacity lead to?

<p>Improved standards of living (A)</p> Signup and view all the answers

What is one of the main benefits of international trade?

<p>Provides access to a wider range of goods and services (D)</p> Signup and view all the answers

How does increased investment contribute to economic growth?

<p>It promotes higher production and more jobs (D)</p> Signup and view all the answers

What is the main result of specialization?

<p>Increased efficiency and a wider variety of goods and services (C)</p> Signup and view all the answers

What is one of the main reasons why consumers benefit from international trade?

<p>Lower prices for goods and services (B)</p> Signup and view all the answers

Which of the following is NOT a factor contributing to differences in economic activity across nations?

<p>Uniform currency systems across nations (D)</p> Signup and view all the answers

What economic policy measure is often adopted by governments to protect domestic industries?

<p>Trade restrictions like tariffs and exchange controls (D)</p> Signup and view all the answers

What impact could outsourcing to countries like India have on Western economies?

<p>A potential current account deficit (D)</p> Signup and view all the answers

What does the text suggest about the difference in economic policies between nations and within a nation?

<p>Economic policies within a nation are generally consistent, while those across nations vary. (B)</p> Signup and view all the answers

Which of the following is NOT a reason why a government might implement trade restrictions?

<p>To promote free trade and open markets (A)</p> Signup and view all the answers

What is the primary reason mentioned in the text for the difference in demand for luxury goods between rich and poor countries?

<p>Differences in income and purchasing power (C)</p> Signup and view all the answers

What role does currency play in domestic and international economic transactions?

<p>Currency is essential for facilitating both domestic and international transactions. (A)</p> Signup and view all the answers

Which of the following factors is NOT discussed in the text as a reason for differences in economic activity between nations?

<p>Differences in population growth rates (A)</p> Signup and view all the answers

Flashcards

Internal Trade

The exchange of goods and services within a country.

International Trade

The exchange of goods and services between countries.

Currency Differences in International Trade

Different currencies are used in different countries, leading to the need for currency exchange to facilitate international transactions.

Currency Fluctuation's Impact on International Trade

The value of a country's currency fluctuates based on various economic factors, affecting the cost of imported and exported goods.

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Distance and Cost in International Trade

The distance between trading partners significantly influences transportation costs, often making international trade more expensive compared to domestic trade.

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Trade Restrictive Practices in International Trade

Government policies aimed at restricting international trade, such as tariffs and quotas, can impact the volume and flow of goods.

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Trade Promoting Practices in International Trade

Government policies aimed at encouraging international trade, such as free trade agreements and subsidies, can promote trade growth.

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Currency Exchange in International Trade

The process of converting one currency to another, essential for international transactions.

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Demand for Luxury Goods

The demand for luxury goods is higher in wealthy countries like America and England compared to poorer countries like Bangladesh and Nigeria.

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Political Policies and Trade

Different nations have varying political policies, influencing trade and economic activities.

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Trade Restrictions

Nations often use trade restrictions like tariffs and exchange controls to protect domestic industries and employment.

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Economic Policies and Trade Deficits

Economic policies, like those aimed at reducing outsourcing, can impact a nation's balance of payments and create trade deficits.

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National Welfare and Economic Policies

Economic policies are designed to benefit the citizens of a nation, not necessarily foreigners.

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National Currency and Trade

Each nation uses its own currency for domestic transactions and exchange of goods and services.

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Consumption Patterns and Income

Countries like Bangladesh and Nigeria, often with lower per capita income, tend to consume less luxurious goods.

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Economic Policy Objectives

Nations choose different economic policies to achieve specific goals like protecting domestic industries or controlling trade deficits.

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Trade Blocs

A group of countries that agree to reduce or eliminate trade barriers among themselves, leading to increased trade and economic integration.

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NAFTA (North American Free Trade Agreement)

A trade agreement that creates a free trade area among Canada, Mexico, and the United States, reducing tariffs and other trade barriers.

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Free Trade Area

A type of trade block where member countries eliminate tariffs and other trade barriers among themselves, but each country maintains its own trade policies with non-member countries.

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Artificial Trade Barriers

Government actions, such as tariffs, quotas, and regulations, that make it more difficult or expensive for goods to be imported or exported.

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Tariffs

A tax imposed on imported goods, raising their price and potentially decreasing demand.

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Quotas

A limit on the quantity of a specific good that can be imported into a country, restricting supply and potentially raising prices.

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Investment Regulations

Rules and regulations that govern the movement of goods and services across national borders, potentially creating barriers to trade.

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Natural Barriers

Physical features, such as mountains and rivers, which can hinder trade by making transportation difficult and expensive.

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Natural physical barriers

Obstacles, like mountains and rivers, that make it difficult to transport goods to markets.

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Absence of transport facilities

The lack of adequate transportation infrastructure, such as roads and railways, hinders the movement of goods to markets.

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Technology

The application of knowledge and expertise to overcome production obstacles.

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Cost Advantage

Technology helps countries transform their weaknesses into strengths by using resources effectively.

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Substitution of Factors

Technology allows countries to use resources they have in abundance, like labor, instead of those they lack, like oil.

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Domestic Demand

The ability of a country to sell its products to other countries depends largely on the demand for those products within its own borders.

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Domestic Demand Impact on Exports

When a country's domestic demand increases, due to factors like higher incomes or population growth, it can negatively affect its ability to export goods.

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Export Capacity

The ability of a nation to sell its products abroad is influenced by the demand for those products in its domestic market.

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Productivity and National Wealth

Higher levels of productivity lead to increased production capacity, allowing a nation to produce more goods and services, ultimately contributing to higher national wealth.

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Optimal Resource Allocation

Optimal allocation of resources, including labor and capital, ensures that resources are used efficiently to maximize output and minimize waste.

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Benefits of International Trade

International trade allows countries to specialize in producing the goods and services they are most efficient at, leading to increased production and higher incomes for both trading partners.

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International Trade and Consumer Prices

Increased international trade leads to lower prices for consumers as they can access a wider range of goods and services from different countries, often at lower prices.

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Investment and Economic Growth

Increased investment in a nation leads to higher production and higher employment, ultimately boosting national income and living standards.

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How do changes in domestic demand impact exports?

Changes in consumer preferences, fashion trends, government policies, and overall market conditions can lead to a decrease in domestic demand for a product. This decrease can create opportunities for exporting the product.

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Why might a country import a product it can produce?

Sometimes, a country might import a product even though it's capable of producing it domestically, due to factors like higher domestic demand, lower production costs in other countries, or competitive pricing.

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What is product differentiation in International Trade?

Product differentiation is when businesses make their products stand out from competitors. This can involve unique designs, packaging, or advertising strategies, aiming to attract international customers and increase export sales.

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How does transport cost impact international trade?

Transportation costs play a crucial role in international trade. High transport costs can negate any cost advantage a country may have, potentially making it less competitive in the global market.

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What are heterogeneous products in international trade?

Heterogeneous products refer to goods and services that differ in characteristics and quality. This variety is a defining characteristic of international trade, where countries specialize in unique products and services.

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What is international trade, and why does it exist?

International trade involves the exchange of goods and services between countries. It is fueled by several factors, including comparative advantage, specialization, and the desire to access new markets.

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How do transport costs relate to international trade theories?

Adam Smith and other economists emphasized the importance of transport cost when explaining the benefits of international trade. However, in reality, transport costs can significantly influence the cost advantage of a country, potentially turning it into a disadvantage.

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What strategies do countries use to boost exports?

Countries often adopt strategies like product differentiation to increase their exports. By making their products stand out, they can attract international customers and gain a competitive edge in global markets.

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Study Notes

Differences Between Internal and International Trade

  • International trade, similar to inter-regional trade, results from the division of labor.
  • Both types of trade involve specialization in goods with a comparative advantage.
  • Differences exist due to factor mobility, natural resources, capital stock, political systems, currency, and separate markets.

Immobility of Factors of Production

  • The degree of immobility for factors like labor and capital is generally higher between countries than within a country.
  • Immigration laws, citizenship requirements, and foreign investment policies restrict international factor mobility.

Heterogeneous Markets

  • Global markets lack homogeneity due to language, tastes, preferences, and customs.
  • Domestic markets are often homogeneous.
  • Different types of cars are needed for different countries (e.g., left-hand drive vs. right-hand drive).

Different National Groups

  • Socio-economic factors, like living standards and income, influence the type of goods and services demanded in a nation.
  • These factors differ between countries, leading to different consumption patterns (luxury vs. basic goods).

Different Political and Economic Policies

  • Different nations have varying political and economic policies, including trade restrictions.
  • Nations use trade restrictions (e.g. tariffs, quotas, exchange restrictions) to protect domestic industries, reduce imports, and preserve foreign exchange reserves.

Different Currencies in Circulation

  • Domestic trade uses a single currency (e.g., Indian Rupee in India).
  • International trade involves multiple currencies with fluctuating values (e.g., US dollars, Euros).

Distance and Cost of Transport

  • International transport distances and costs are typically higher than domestic transport distances and costs.
  • Lower transport costs contribute to more significant domestic trade.

Trade Restrictive Practices

  • Trade restrictions (tariffs, quotas, exchange regulations) are common place in international trade but are less common in domestic trade.

Number of Buyers and Sellers

  • International trade has a larger number of buyers and sellers compared to domestic trade.
  • This makes international trade riskier and more competitive.

Factors Influencing International Trade

  • Nations trade due to differing amounts of factors (e.g. Labor and/or Capital).
  • Nations export and import based on the abundance of factors in their country. (e.g., a nation with lots of labor will often export labor intensive products.)

Technological Development

  • Technology's role is growing in the production process, helping overcome production and cost issues.
  • This helps transform national cost disadvantages into cost advantages.

Size and Extent of Domestic Demand

  • Domestic demand for products affects exports.
  • Increased demand can decrease export capacity.
  • Changes in domestic demand due to income or population shifts.

Product Differentiation

  • International trade is characterized by highly competitive and heterogeneous markets.
  • Countries differentiate products to attract customers in international markets. (e.g. different features or styling.)

Transport Costs

  • Transport costs are a significant factor affecting international trade.
  • Higher transport costs can turn an advantage into a disadvantage.

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Difference Between Internal and International Trade PDF

Description

This quiz explores the fundamental differences between internal and international trade. It delves into concepts such as factor mobility, market heterogeneity, and how socio-economic factors influence trade. Test your understanding of these key economic principles related to trade between nations.

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