4.1.2 Advantages And Specialisation

Question 1

Define comparative advantage

Answer 1

When a country’s production of good or service has a relatively less opportunity cost compared to other countries

Question 2

Define absolute advantage

Answer 2

The ability to produce a good more efficiently, eg. Less labour.

Question 3

Define comparative advantage

Answer 3

The ability to produce a good relatively more efficiently eg lower opportunity cost

Question 4

Assumptions and limitations to comparative advantage

Answer 4

1. Assumes there is only 2 product with 2 countries
   Limitation: more than 2 products and 200 countries
2. No transport cost and trade barriers
   Limitations: tariffs exist and transportation cost, flight cost, rail cost exist
3. FOP are perfectly mobile and can switch from one to another good easily
   Limitations: some fop cannot change (eg land) labour too specialised cannot be changed
4. COP stays constant, no economies of scale
   Limitations: economies of scale may occur as production increases, diseconomies of scale could also occur due to higher variable cost
5. Assumes producers to have perfect knowledge to the cost and methods of production. Relative cost between countries can be compared
   Limitations: firms keep knowledge as a secret and it is difficult to measure opportunity cost.

Question 5

Limitation of the comparative advantage theory

Answer 5

1. Does not account of externalities
2. Does not account of non price factors
3. Does not account of strategic important goods
4. Does not account of time period

Question 6

Disadvantages of specialisation and trade

Answer 6

1. Trade deficit if not competitive
2. Dumping may occur
3. Unemployment from losing comparative advantage
4. More vulnerable to shocks and volatile to external shocks
5. Risk of global monopolies
6. Unbalanced economic development from overspecialisation of scomparagive advantages
7. Overdependent on exporting particular comparative advantage product