4.1 - Specialisation and trade Flashcards

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1
Q

What does it mean if a country has a comparative advantage?

A

When a country is able to produce a good more cheaply relative to other goods produced. It has a lower opportunity cost.

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2
Q

What is the theory of comparative advantage?

A

Countries find specialisation mutually advantageous if the opportunity costs are different.
- opportunity cost is the sacrifice of alternative products made when you specialise in another.

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3
Q

What is absolute advantage?

A

When a country is able to produce a good more cheaply in absolute terms compared to another country.
- the country is able to produce a greater quantity of a good using same factors of production

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4
Q

Assumptions and limitations of theories of comparative and absolute advantage.

A
  • comparative advantage assumes there are no transport costs (could lower or prevent comparative advantage)
  • Assumes that costs are constants and there are no economies of scale to help increase gains of specialisation
  • Assumes goods are homogenous (this is unlikely)
  • assumes factors of production are perfectly mobile ( no tarrifs or other trading barriers and there is perfect ) knowledge
  • difficult to conclude a country has comparative advantage if goods cannot be perfectly compared.
  • Ignores possible externalities of producing/consuming the good.
  • whether or not a trade takes place depends on terms of trade of both countries.
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5
Q

What are the advantages of specialisation and trade in an international context?

A
  • Greater competition
    > provides incentive to innovate
    > creates new g/s + new production methods
    > increases consumer welfare
  • Greater consumer choice
    > international market opens consumers to larger variety of g/s
  • Countries/firms can benefit from economies of scale
    > have access to larger markets
    > increases demand for their goods
    > increase output and benefit from EOS
    > lowers average costs
    > lower prices fall onto consumers and firms as firms are more efficient
  • Increase economic growth/raise living standards
    > countries are able to specialise in g/s they have comparative advantage in
    > output increases (reduce unemployment, labour is derived demand)
    >higher economic growth rate (>increase in real wages>increase standards of living)
  • lower prices
    > comparative advantage allows countries to specialise, producing at lowest opportunity cost
    > factors of production exploited so they can lower overall production costs - able to produce good at lowest cost per unit
    > lower prices fall onto consumers
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6
Q

What are disadvantages of specialisation and trade in an international context?

A
  • environmental costs
    > transport + increased output
  • Danger of dumping by foreign firms
    > large supply of g/s leading to falling prices of them
    > If domestic firms are less competitive than their foreign competitors, may end up making a loss at this lower price
    > forced out of the market.
    > lead to further problems for the country such as a large increase in the unemployment rate.
  • Structural unemployment
    > domestic firms may be out-competed in global market
    > labour is derived demand - if demand for a firms good declines - unable to provide jobs
    > worse if workforce is immobile as more sensitive they are to changes in demand causing a decrease in output
  • Over-dependence
    > increase in exposure to external shocks:
    > eg: recession, conflicts, political issues, price falls in exports - lead to decrease in export revenue/import cuts - countries rely on this
  • Trade deficit on current account
    > Countries that do not have a comparative advantage will suffer from low export revenue and relatively high import expenditure
    > likely to experience large trade deficits, thus reducing aggregate demand and economic growth rates.
    > typical developing countries who lack global competitiveness and are importing for necessity goods will suffer.
  • loss of sovereignty + culture
    > With an increase in trade, languages and cultures have blended impacting on some indigenous languages and cultures.
    > Countries have also lost some sovereignty as they are more easily influenced by dominant trading partners
  • Global Monopolies Emerge
    > As transnational firms grow in size and increase market power,
    > they can dictate prices and output in many regions.
    > They are also able to to influence governments and gain access to raw materials through bribery and corruption
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