-Country B specialises in the production of Good Y.
-Country A produces mostly (but not only) good X.
-Agree a trading price that is between the opportunity costs in each country.
Result: each country will have higher consumption of both goods, compared to producing all themselves.
The freer movement of goods, services, capital, ideas, people, and technology around the world.
To revert to full capacity (full employment), the government should stimulate AD through spending.
Keynesian AS curve
→ Investment could be spent on ineffective projects e.g. HS2.
→ Could lead to SR unemployment.
→ SR opportunity cost = less consumption.
→ Possibly unbalanced economy e.g. China.
→ Too much investment becomes a glut, leading to a fall in prices and crash. e.g. 2009 housing market crash in USA
Terms of Trade =
Index of Import Prices / Index of Import Prices X 100
Producing a good or service at a lower opportunity cost than another country.
C and E
→ As a country exports an in-demand commodity, the demand for their currency rises.
→ The currency appreciates.
→ Other industries are not competitive due to strong exchange rate and shut down.
→ This weakens the country's industrial base and is a problem when the price of the commodity falls.
Free trade will improve incomes
(e.g. Craftworkers in Jodhpur earn 500 rupees per day compared to national average of 270)
