4.1.2

Question 1

What is the theory of comparative advantage?

Answer 1

Specialisation is advantageous to both countries if they have different opportunity costs to production.

Question 2

What is opportunity costs?

Answer 2

The next best alternative foregone when making a decision.

Question 3

What is comparative advantage?

Answer 3

When a party can produce a good or service at a lower opportunity cost in relativity to another party.

Question 4

Who founded the comparative advantage theory?

Answer 4

David Ricardo

Question 5

What assumptions does the comparative advantage model make?

Answer 5

. No externalities ( production & consumption)
. High mobility of labour and capital
. Low transport costs
. Constant returns to scale
. No trade barriers (tariffs)

Question 6

What factors effect comparative advantage?

Answer 6

. Natural resources
. Unit wage costs
. Infrastructure
. Non-Price factors
. Import controls
. Exchange rates