Economics 2: The World Economy
Assessment Task Bank 1
February 13, 2015
Explain what is meant by the term free trade.
Free trade is a system in which goods, capital and labour flow freely between nations.
Fair trade does not mean farmers and producers receive more money so they can support their families in the short term. It means they work under long-term contracts so their communities have enough money to invest in improvements both to their businesses with things like more land or better machinery. It also helps their societies with new schools and new health clinics to fight diseases.
Economies of scale - Free trade enables countries to specialise in producing certain goods. Therefore, they can produce a higher output and benefit from lower average costs. This is important for industries with high fixed costs.
Increased competition - Free trade means that domestic monopolies will face more competition from other countries. This increased competition encourages firms to cut costs and be more efficient.
Free trade also means that there is a wider range of products for consumers to buy.
Explain absolute and comparative advantage using either a worked example or an analysis of the change in the United Kingdom’s absolute and comparative advantage
Absolute advantage is said to exist when a country can make a product more cheaply than any other country.
Comparative advantage is said to exist not when we compare the financial cost of making the goods but when we compare the opportunity cost. What does a company have to give up in order to make a good? If it is less than another country has to give up to make a good then the 1st company has comparative advantage.
| Hours needed to make |
| 1 Car | 1 ton of cheese |
UK | 15 | 5 |
China | 4 | 2 |
As we can see from the table above if it takes 15 hours to make a car in the UK and only 4 hours in China. It is...