Economics 12

Thirafi

Instructions:

Answer the following in your notebooks. Follow the Assessment Objectives’ Definition of
Command Terms in Economics in page 96 - 97 of the IB DP Economics Guide that you can
download thru this link:

http://sdgj.cdhuaying.com/ckfinder/userfiles/files/85bb14ce9348bcfb594e7e61ecb40c1d.pdf

Assignment # 1:

A. Define the following terms: (1 mark each)

1. Trade : involves the buying and selling of goods and services.

2. International Trade: Involves the buying and selling of goods and services across international
boundaries.

3. Free Trade: Where there’s no government intervention to impose restrictions.

4. Import: Where the goods are being brought into one country from another.

5. Export: Where the goods produced in a country is shipped out to another counrty to be sold
there

6. Specialization: When an individual, firm, or country concentratres production on one or a few

goods/services.

B. Outline the 7 Benefits of Trade (1 mark each)

1. Increae in domestic production and consumption due to specialization

2. Economic of scale in production

3. Greater choice for consumer

4. Increased compettion and greater efficiency in prodution

5. Lower prces for consumer

6. Acquiring needed resources

7. Source of foreign exchange

C. Explain the 7 Benefits of Trade (2 marks each)

1. If a country is able to specialize, then they’ll be able to produce a higher quality product
which can lead to efficiency.

2. Since the firm is supposedly asked to produce more goods/services, therefore it’s
average cost will decreaase causing it to be able to sell the products at a lowe price.

3. Since different countries can specialize in different things, they can offer a wider range
of products along with a higher quality for the consumers to choose from.

4. Since consumers will prefer the lower-priced imported products, therefore it might
make high cost firms go out of business. Because of this, it’ll increasd competition leads
to greater efficiency.

5. Since there are business which are selling the same products, they’ll compete to sell at
the lowest possble price to attract customers, which benefit the customers where they
are offered a range of cheaper prices.

6. Some country might lack the raw materials needed to create the product, therefore
trade allows the import/export of materials in order to create products.

7. Trade allows people to make payments to other countries fo the goods/services they
import or to make other payments abroad.

Assignment # 2:

A. Define & Explain the following terms: (2 marks each)

1. Theory of Absolute Advantage (HL Only)

The ability of one country to produce a good using fewer resources than another
country due to specializin. By doing this, and if the country is able to export the products, than
it’ll be able to increase it’s production and consumption in each country.

2. Theory of Comparative Advantage (HL Only)

It is when a country with absolute advantages in production of both goods but whose
opportunity cost is similar or more than the smaller counterpart. It calculates the opportunity
cost and ability of a worker to produce and uses it as a basis to determine which country
produces what.
3. World Trade Organization (WTO)

They provide the instituional and legal framework for the trading system that exists
between member nations world wild. Their objectives is to ease the process of trading world
wide by implementing, administrating, and monitoring trade agreements along with
discussment of trade issues and negotiation on how to liberlise trade.

B. Describe the: (1 mark)

Sources of Comparative Advantage

That countries can increase production & consumtion of goods through specialization and trade
due to tge differences in quantities and quality of factors of production, and in levels of
technology

C. Draw a diagram & Explain the following: (3 marks each)

1. The Gains from Absolute Advantage

Absolute advantage is when a country is the ability of a country to produce a certain good using
fewer resources than the other. This relates to the concept of specialization, in this case it is the
specialization of a country to produce a certain good, coffee for Coffeenia, and robots for
Robotia. The main idea for this is that 2 countries that specializes in different goods can benefit
one another through trade. Coffenia is able to produce 8 coffee max while only 3 max for
Robotia. On the other hand Robotia can produce 6 robots at most and 4 for Coffeenia. So by
trading with one another it can increase the consumption of the goods of both products
because each country doesn’t have to spend half of the resources producing half of each goods,
because producing at both maximum potential will lead to more total number of goods
produced, and be more efficient.
2. How Comparative Advantage Works?

Comparative advantage works in a way that revolves around the concept of opportunity cost.
The opportunity cost for a country with an absolute advantage might be equal or even less that
a country without an absolute advantage. This difference is what makes comparative advantage
works. In the graph we can see the cost of producing 50 microchips is 25 cotton for
Microchippia which means the opportunity cost is 25/50=1/2, whilst in Cottonia it is 20/10=2.
However if Cottonia produces cotton its OP(opportunity cost) is only 10/20=1/2, both countries
can be better off by having them produce whatever lowest opportunity cost they can, in
Microchippia’s case it’s microchips, and cotton for Cottonia. The way to determine which
country specializes in a comparative advantage graph is through the line’s steepness, wherever
axis the line is flatter/closer to is what country specializes in it.

D. Calculate from a Set of Data in Order to Identify Comparative Advantage (4 marks)

In order to calculate and identify comparative advantage we need to calculate the opportunity
cost from the PPC diagram given or a table of data. In this case we use the table to make it
simpler. Cottonia can produce 20 cottons or 10 microchips, Microchippia can produce 25
cottons, or 50 microchips. To calculate for the opportunity cost of the production of each goods
from each country we divide the maximum alternative good produced divided by the chosen
good produced, in Cotonnia’s case for cotton it is 10/20=1/2. For microchips in Cottonia it is
20/10=2 which means that it is a lot more efficient to produce cottons in Cottonia because
we’re only giving up half a unit of microchips for 1 unit of cotton.

E. Discuss the following: (3 marks each)

1. Real-World Relevance of the Theory of Comparative Advantage (HL Only)

The theory of Comparative advantage is about specialization and opportunity cost where in
different countries can specialize in the production of different goods, however some countries
are just fortunate enough to be able to have a higher absolute advantage in the production of
multiple goods. However in comparative advantage theory absolute advantage means nothing
and the basis for trade and resource allocation is based on the opportunity cost of the
production of the good. The concept is well thought out and has been the basis for many trade
policies and has led to an improved global resource allocation. However it has its limitations
which is the fact that it depends on so many unrealistic conditions/assumptions for it to be
completely true.

2. Assumptions on which the Principle of Comparative Advantage Rests

The theory of comparative advantage is also said to be “too theoretical” because it depends on
too much unrealistic assumptions such as: Immobile/fixed factors of production which means
that the factors of production are fixed on certain location and will not have its skill/education
improve. Fixed technology, meaning technological advancements are not accounted for. Full
employment of resources, where a certain country will maximize all their resources and
produce at their most efficient (PPC). Balanced incoming and outgoing goods (import/export),
where the worth of the country is (virtually) unaffected by import/export. Trading on the basis
of comparative advantage may lead to excessive specialization, in a case where a certain
country would specialize in one or more (small number), they are vulnerable to factors that is
beyond their control, when a country who depends solely or at least mostly on exports and
imports can’t import/export due to a global recession or a decline in demand, then they will
have a major decline in revenue and cause the economy of the entire country a recession.
3. Criticisms & Limitations of the Comparative Advantage

The comparative advantage theory has many flaws and has been criticized strongly due to how
dependent it is on very unrealistic assumptions. Its flaws are similar to the previous answer
which is: how the factors of production are fixed, fixed technology, and how it assumes that all
countries can produce at 100% efficiency and completely allocate their resources for the good
they specialize in producing.

4. WTO History, Functions & Objectives

The WTO was made due to an agreement on Tariffs & Trade in 1947 with the intentions to
gradually liberate international trade & prevent further outbreaks of tariff wars. In 1994 they
changed its name to the World Trade Organization due to a high increase in its member. The
WTO functions to administer agreements in trades, provides a forum for trade organizations,
and to handle any sort of issues regarding trades. It may also provide technical assistance and
training and cooperate with other international trade organizations. The objectives of the WTO
is to have achieve fairness in all trades, achieve free trades, be predictable and encourage
economic development.