-Comparative advantage is seen when a country has a lower relative opportunity cost in the production of a good when compared to another country in the respective areas of production for similar given resources, despite not producing more units of goods as compared to another country. (One country is efficient in the production of both goods while the other country is inefficient in the production of both goods: specialisation for the efficient country is based on the goods with higher relative efficiency while specialisation for the production of country which is inefficient is based on the good with lower relative efficiency.

-2 countries

-2 commodities

-No transportation costs

-No trade restrictions

-No foreign exchange difficulties

-Constant returns to scale in both industries in both countries

-Perfect knowledge and perfect mobility of factors within the country

-Limited resources of each country are fully employed

-Absolute advantage is seen when a country can produce more units of a good as compared to another country for the given level of resources. (One country is efficient in the production of one good while the other country is efficient in the production of another good)

-It is derived from the term of trade which is based on the opportunity cost. The international trading must be within the range of the term of trade such that the trading price based on opportunity cost is higher than the opportunity cost of the exporter or seller and lower than the opportunity cost of the importer or the buyer.

-Increasing competition between countries leads to the closure of small local firms

-Encourage the depletion of resources

-Expose the economy’s vulnerability in term of over dependency for economic growth

-Stifle the country’s creativity and adaptability of the workers as it promotes specialization

-Stifle economy from exploring other areas of growth

-Countries can now reap the advantages of economies of scale. (cost saving gained from large scale production – fall in AC=TC/increase in Q) With increased trade, there would be increased market demand. Thus production will increase, allowing firms to reap EOS, lowering average costs of production

-Consumers can now enjoy a greater variety of goods and services. This would increase the standards of living in the country since the consumer can enjoy other types of goods, which the country is not able to produce due to both natural and man-made constraints.

-Trade can also enhance greater efficiency in production through greater specialization. This would allow firms to cut down on costs of production, which could lead to lower prices that consumers can enjoy.

-With trade, the country’s PPC can be shifted outwards as the availability of resources increases

-A country embarking on economic development can now import more capital equipment and raw materials for its economic development. In due time, the country will be able to expand the production capacity and hence achieve economic growth

-A wider variety of goods and services at a lower price level for consumption to raise consumer satisfaction, satisfying their taste and preferences

-Firms are able to enjoy both internal and external economies of scale – large scale of the market – increase in production  - reap EOS and lower average cost of production

-Increasing world output – specialization based on comparative advantage – will raise the efficiency of production of the respective countries which specialize – thus raising world output

-Countries with surplus of raw materials can export these in exchange of other goods and services – enable optimization of resources at a global scale – reduces wastages

-Increased competition among suppliers in world markets – raise the efficiency of production – the world market has more producers

-Provide growth for the nations engaged in trade as there is greater market and flow of foreign direct investment – raise the production capacity and opportunities of employment

-Facilitates transfer of knowledge and technology

-Promotes beneficial political links

-Countries will trade with another country without comparative advantage in trade – buy  from source with a higher price level – Proximity of the countries – lower transport cost will reduce trading price

-There may be trade restrictions and exchange rate fluctuations distorting the international trading price, making it less beneficial to trade with these countries

-Dynamic CA refers to the capacity of the economy in adjusting its comparative advantage to raise international competitiveness

-To overcome the lack of resources – small economy

-To derive an international market - to overcome the limitation of small nation (lack of market)

-To use trade as a means to increase competitiveness - derive lower cost of imports to lower cost of production – to attract more FDI and increase export demand

-Use FTA to raise Xd so as to induce more FDI – FDI will increase because MNC only invests in Singapore as we can export due to our export capacity

-To avoid the disadvantages of specialization

-To reap the advantage of diversification

-Widen the scope of economic growth

-Provide a greater variety of jobs for employment

-Provide greater synergy of the economy to enhance the integration of the industries which raise our competitiveness as a global hub for trade and investment

-A country’s TOT worsens when the unit value of its imports rises by a bigger % than the unit value of its exports.

-A deterioration in TOT means that the country is able to obtain less foreign goods for the same quantity of exports

-A country’s TOT improve when the unit value of its imports rises by a smaller % than the unit value of its exports

-An improvement in TOT means that the country is able to obtain more foreign goods for the same quantity of exports

-Improvement in the TOT for one country is deterioration in the TOT for another country

-For TOT Index: Index of price of exports/Index of price of imports

-Affects BOT (Change in TOT will affect export and import demand

-Affects Global equality of distribution of Y and wealth

-Determine the degree of expansion of economy of resource capacity - can attain potential growth easier

-May affect the cost of living as the price of import will be affected while the price of export will affect export demand and the level of production and national income

-May affect SOL as TOT will affect our price of imports and exports which will affect our export and import demand

A free trade agreement involves the abolishment of tariffs and other forms of trade restrictions and it may include other forms of de-regulations such as:

-Abolishment of restriction on mobility of resources and fund

-Intellectual Property rights

-Protection of Investment and Return

-Lower prices of imports

-Higher prices of exports

-Changes in exchange rate

-Inflation rate – affect cost of production – affect price of export and import

-relative income level

-taste and preference of the products

-change in exchange rate

-comparative advantage – affected by the change in cost of production

-structural changes in the economy – economic development

-International trading price will make the term of trade more favourable for trading countries to allow them to shift the PPC outward to TPC to allow higher level of consumption beyond PPC (TOT range, 10C<1W<15W)

-If the favourable TOT is due to improvement in the quality of the product which will raise the export demand and the price of exports, there will be a higher level of production which will raise national income and employment. Furthermore, when the export demand is price-elastic, it will induce rise in export revenue which will lead to higher level of production, employment and rise in national income.

-If the favourable TOT is due to rise in cost of production, there will be a rise in price of export demand which will decrease export demand. Subsequently, a fall in production, employment and national income. Furthermore, when the export demand is price-inelastic, the total revenue for export will decrease. Therefore, it can be seen that favourable TOT will lead to favourable and less harmful impact.

-Minimize conflicts between nations

-Common market allows more efficient trade

-Guaranteed increase in trade

-Unable to protect infant industries

-Raise the standard of living through trade which allows the consumers to attain a greater variety of goods and services at lower price – seen front the expansion of consumption possibilities

-Expand the potential and actual growth of the economy as specialisation and trade will raise resource and production capacity

-Expand their export market which will allow the MNCs to attain economies of scale through large scale of production made possible from EOS.

-Attain more resources to expand their production capacity to achieve sustainable economic growth

-Raise the standard of living through trade which allows the consumers to attain a greater variety of goods and services at lower price – seen front the expansion of consumption possibilities

-Expand the potential and actual growth of the economy as specialisation and trade will raise resource and production capacity

-Provide massive employment as trade will encourage more investment which will raise large scale of production that induces employment.

-Attain a higher level of technology through transfer of technical knowledge

-Attain more fund for investment which will allow the nation to pursue economic development, overcoming the lack of funding for economic development

-Increase the complexity of trade which will complicate the bureaucratic process and raise transaction cost

-Reduce the source of government revenue which will lead to the government to impose tax on the local people and thus, raise the tax burden of the people

-Encourage the growth of market power as the firms are likely to grow and thus, raise the degree of consumer exploitation

-Create structural unemployment as the developed nations adjust their comparative advantages which will contribute to the change in the sectors of the economy

-Increase the complexity of trade which will complicate the bureaucratic process and raise transaction cost

-Reduce the source of government revenue which will lead to the government to impose tax on the local people and thus, raise the tax burden of the people

-Encourage the growth of market power as the firms are likely to grow and thus, raise the degree of consumer exploitation.

-Accelerate the exploitation of resource utilization, thus undermining the potential growth.

-Create unequal distribution of income and wealth as portion of the population who fail to capitalize on the economic development will be undermined

-Develop vulnerability as the economy relies extensively for the global market, subjecting the economy to the global trade cycle and economic trends and crisis

-Facilitate transfer of knowledge and technology

-Reduce the need for infrastructures that FDI brings in

-Dependency on foreign firms

-Vulnerable to foreign business cycles

-High transport cost

-Lack of mobile factor

-Increasing cost of production

-Market imperfections

-Political instability

-Acts of protectionism like dumping and bank

-Refers to the rate at which a country exchanges its export for imports.

-Minimize conflicts between nations

-Common market allows more efficient trade

-Guaranteed increase in trade

-Unable to protect infant industries

-It refers to the exchange of goods, capital or services between countries.

-It refers to the a graphical representation of alternative combinations of  the quantity of two particular goods or services that an economy can produce by re-allocating resources from one good or service to another. The curve aids in efficient allocation of resources without adversely affecting the required production of essential goods or services.