A Level H1 Economics International Economics Quiz

Answer Key - A-Level Economics H1 Quiz: International Economics

Section A

1. Comparative Advantage: The ability of a country to produce a good or service at a lower opportunity cost than another country. [3]
2. Absolute vs Comparative: Absolute advantage is the ability to produce more of a good using the same resources. Comparative advantage is producing at a lower opportunity cost. A country can have absolute advantage in everything but cannot have comparative advantage in everything. [4]
3. Reasons for Protectionism: 1) Protecting infant industries; 2) Protecting domestic employment/jobs; 3) National security/strategic autonomy; 4) Preventing dumping. (Any two) [4]
4. Terms of Trade (ToT): ToT = (Index of Export Prices / Index of Import Prices) x 100. An improvement (increase) means export prices rise relative to import prices. The country can purchase more imports for the same volume of exports, increasing purchasing power. [4]
5. Tariff vs Quota: A tariff is a tax on imported goods (price-based). A quota is a physical limit on the quantity of a good that can be imported (quantity-based). [4]
6. Government Revenue: Tariffs generate direct tax revenue for the government. Quotas do not generate government revenue unless the government auctions import licenses. [4]
7. Specialization: When a country focuses its productive resources on producing a limited range of goods in which it has a comparative advantage. [3]
8. Infant Industry Argument: New industries lack economies of scale and experience. Tariffs protect them from established foreign competitors, allowing them to grow, lower average costs, and eventually become competitive. [5]
9. Disadvantages of Single Partner: 1) Vulnerability to supply chain shocks in that partner country; 2) Over-dependence/Political leverage given to the partner. [4]
10. Productivity & Comparative Advantage: Higher productivity reduces the cost of production. If productivity increases faster in one good relative to others, the opportunity cost of producing that good falls, strengthening the comparative advantage. [5]

Section B

11. Tariff Diagram:
    • Diagram: Supply/Demand with World Price ($Pw$) and Tariff Price ($Pw + t$).
    • Analysis: Price rises $\rightarrow$ Domestic demand falls $\rightarrow$ Domestic supply increases $\rightarrow$ Imports decrease. [8]
12. Comparative Advantage Analysis:
    • Focus on opportunity cost. Even if Country A is better at both, it will specialize in the good where its advantage is greatest (lowest opportunity cost).
    • Trade allows both to consume outside their PPC. [8]
13. Singapore ToT:
    • $\uparrow$ Global demand for semiconductors $\rightarrow$ $\uparrow$ Export prices of semiconductors.
    • If import prices remain constant, the ratio of export price to import price increases $\rightarrow$ ToT improves. [7]
14. Subsidies as Protectionism:
    • Subsidies lower the cost of production for domestic firms $\rightarrow$ $\downarrow$ MPC.
    • Domestic firms can lower prices to compete with imports or maintain profits at world prices, increasing domestic market share. [7]
15. Trade War Impact:
    • Mutual tariffs $\rightarrow$ $\uparrow$ Price of imports in both countries $\rightarrow$ $\downarrow$ Quantity demanded of imports.
    • Overall global trade volume falls; deadweight loss created in both economies. [8]

Section C

16. Free Trade Evaluation:
    • Agree: Efficiency, lower prices, variety, economies of scale.
    • Disagree: Structural unemployment in declining industries, over-dependence on imports, loss of infant industries.
    • Judgment: Beneficial in aggregate, but creates winners and losers. [10]
17. Employment vs Quotas:
    • Justification: Prevents job losses in domestic sectors.
    • Counter: Higher prices for consumers, inefficiency (lack of competition), potential retaliation.
    • Judgment: Short-term gain for workers, long-term loss for economy. [10]
18. FTAs vs Multilateral:
    • FTAs: Faster to negotiate, tailored to specific partners, deeper integration.
    • Multilateral (WTO): Broader reach, prevents "spaghetti bowl" of conflicting rules, more stable.
    • Context: For a small state like Singapore, FTAs provide critical market access. [10]
19. Protectionism & Welfare Loss:
    • Analysis: Consumer surplus falls significantly; producer surplus rises; government gets revenue (if tariff).
    • Deadweight loss: Production inefficiency and consumption distortion.
    • Evaluation: May be offset by positive externalities of maintaining a strategic industry. [10]
20. Equity in Trade:
    • Analysis: Owners of capital/skilled labor in export sectors gain. Unskilled labor in import-competing sectors lose.
    • Evaluation: Gains are not automatic; requires government redistribution (retraining, welfare) to be equitable. [10]