4.1.2 Specialisation and Trade Flashcards
What is an absolute advantage
Occurs when a country can supply a product using fewer resources than another nation
Who has the absolute advantage at bricklaying
Who has the absolute advantage at baking cakes
Hilary - bricklaying
Donald - cake making
What could two countries do, who have an absolute advantage do to increase output
Specialise fully, then the total amount produced can increase
Who came up with the idea of comparative advantage
David Ricardo
Comparative advantage exists when
Relative opportunity cost of production for a good/service is lower in one nation than another
The basic rule is to specialise your scarce resources in which the goods/services that you are relatively best at
How does comparative advantage link to trade
it opens up gains from specialisation and trade which then leads to a more efficient allocation of resources
Who would have the comparative advantage
Australia, Tobacco: 5/4
Malawi, Tobacco: 2/3
Australia, Beef: 4/5
Malawi, Beef: 3/2
Australia has a comparative advantage in producing beef
Malawi has a comparative advantage when producing tobacco
If countries specialise according to the law of comparative advantage, what can happen
(Assume constant returns to scale)
then total output of both products can rise
the excess can be trades
What are assumptions behind the theory of comparative advantage
- Constant returns to scale - no economies of scale - which may amplify gains from trade
- Perfect factor mobility - between industries (e.g. geographical)
- No trade barriers
- Low transport costs
- No significant externalities - from production/consumption of products being trades
What could be some gains from trade
- Free trade allows for deeper specialisation and benefits from economies of scale
- Free trade increases market competition and choices - driving up quality
- Increased market contestability reduces prices for consumers leading to higher real incomes
- Trade can lead to better use of scarce resources e.g. sustainable tech
List some drawbacks of specialisation and trade
- Transport costs e.g. carbon emissions from increased food miles
- Negative externalities from both production and consumption
- Risk of rising structural unemployment as trade patterns change
- Inequality - benefits from globalisation are unequally shared
- Pressure on real wages to fall in advanced and emerging countries
- Risk from global shocks e.g. global financial crisis
- Countries specialised in few primary commodities may suffer from the natural resource trap
- Volatile global prices affecting export revenues and profits for producers and tax revenues for governments
What is allocative efficiency
Competition from lower-cost import sources drives down market prices down closer to marginal cost and then reduces the level of monopoly (supernormal profit)
What is productive efficiency
Specialising and selling in larger markets encourages increasing returns to scale (economies of scale)
i.e. a lower long average cost of production
Dynamic efficiency
Economies open to trade may see more innovative businesses who invest more in research and development and also in human capital of their workforce to help raise labour producitivty
X-inefficiency
intense competition in markets provide a discipline on businesses to keep their unit costs under control to remain price competitive and profitable
How could you use a supply and demand diagram to demonstrate the effects of trade
Tip: use consumer and producer surplus
Consumers and producers might be affected by the ability to import coal into the EU at an import-tariff free price which is lower than domestic suppliers can offer
Opening up a country to trade has welfare effects for producers consumers, employees, gov and other stakeholders
If (e.g coal) can be imported at a lower price, consumers surplus increases but producer surplus for coal producers in the EU fall because they can no longer sell their output at a previous high price
