4.1.2

Question 1

What is comparative advantage?

Answer 1

A theory which states a country should specialise in a good or service which has the lowest opportunity cost.

Question 1

What is absolute advantage?

Answer 1

When a country is able to produce a product using less factors of production.

Question 2

Country A makes 1 computer chip and must give up 2 t shirts
Country B makes 1 computer chip and must give up 0.5 t shirts

Who has the comparative advantage?

Answer 2

B, they have a lower opportunity cost.

Question 3

How to work out who should specialise in what?

Answer 3

Whoever has a lower opportunity cost when producing one good

Question 4

What are 3 assumptions of Comparative advantage?

Answer 4

Average cost of production is constant
Transport costs are zero
No trade barriers

Question 5

Limitation of ‘Average cost of production is constant’?

Answer 5

Economies of scale can make it cheaper

diseconomies of scale can make it more expensive.

Question 6

Limitation of ‘Transport costs are zero’?

Answer 6

Doesn’t account for moving goods between countries.

Question 7

Limitation of ‘No trade barriers’?

Answer 7

May distort comparative advantage, because it makes it more expensive.

Question 8

What are 3 advantages of specialisation?

Answer 8

World output increases, so living standards increase
International trade increases, so economies of scale due to higher quantity
Lower costs, adds variety to consumers

Question 9

What are 3 disadvantages of specialisation?

Answer 9

Based on unrealistic assumptions
Overdependence on imports and exports
Demotivation of workers rises costs due to lower productivity.