4.1.2 - Specialisation and Trade

Question 1

Define absolute advantage simple

Answer 1

A country is said to have absolute advantage if it can produce more of a good using equal amounts of resource than another country (ie. opportunity cost of production is lower than another country)

Question 2

Define comparative advantage

Answer 2

Refers to the relative advantage that once country or producer has over another. A country can benefit form specialising in and exporting the product for which it has the lowest opportunity cost of supply.

Question 3

How to find who has comparative advantage

Answer 3

Find how many resources forgone to make 1 unit of chosen good for both countries - whoever has to forgo smallets number of resources (as in have the lower opportunity cost) has comparative advantage

Question 4

State two aspects of the principle of comparative advantage

Answer 4

• specialise in good which they have the lowest relative opportunity cost
• trade with the other country to obtain the good they no longer produce
  -over time output will increase

Question 5

Define autarky

Answer 5

Economic independence or self sufficiency

Question 6

Define trading possibility frontier

Answer 6

Exchange rates which allow mutually beneficial trade to take place. In the real world, countries use exchange rates based on currencies rather than goods.

Question 7

State the assumptions of the theory of comparative advantage

Answer 7

• There are no transportation costs.
• There is perfect knowledge, so that all buyers and sellers know where the cheapest
  goods can be found internationally.
• The factors of production are perfectly mobile. This means they can be easily
  switched from producing one good to another (e.g. from bananas to airplanes, from working on a farm to a factory etc.)
• The cost of producing an extra good is a constant amount of money/resources i.e.
  the cost of production is constant.
• There are no external costs in production - externalities ignored e.g. no pollution is created by firms or if
  there is it is internalised.
• There are no barriers to trade.
• no economies/diseconomies of scale

Question 8

What happens if comparative advantage is the same for both countries

Answer 8

There is no gain from trade

Question 9

ref to page 9 of theme 4 LS2 absolute and comparative advantage booklet

Answer 9

diagrammatic display of comparative advatange

Question 10

On diagrams, how can you tell who has the comparative advantage

Answer 10

• the country with a less steep graph for that good has the comparative advantage in producing the good
• but this means they have a steeper radient in the other axis hence they don’t have the comparative advantage in that good

Question 11

Advantages of trade

Answer 11

• lets countries obtain goods they wouldn’t otherwise be able to produce through exchange of good
• consumers in trading countries get larger variety of goods and services, lower prices, more innovation so standard of L rises due to better quality, cheaper and more choice
• additional markets allow firms to get economies of scale as mroe demand
• intl trade exposes firms to new ideas and skills

Question 12

advantages of specialisation

Answer 12

1) Efficiency and Productivity: Specialization allows countries to focus on producing what they are most efficient at, leading to increased productivity and economic growth
2) Consumer Benefits: International trade provides consumers with a wider variety of goods and services at competitive prices, improving their standard of living.
3) Resource Allocation: It enables efficient resource allocation as countries can allocate resources to industries where they have a comparative advantage, reducing wastage.
4) Economies of Scale: Specialization often leads to larger production scales, which can result in economies of scale, further reducing production costs.
5) International Cooperation: Trade fosters peaceful international relations and cooperation as countries become interdependent

Question 13

disadvantages of intl trade

Answer 13

• higher transport costs
• currency exchanges when trading abroad can carry costs, potentially resulting in financial losses
• more costs liek complying with other countries legal and technical requirements, translating legal docs, advertising material and performing market research for overseas market
• vulnerable to geopolitical change (50% of food made in Uk is imported, 30% form Eu so a messy brexit deals caused things to get costly)

Question 14

when does deindustrialisation/structural unemployment happen

Answer 14

when a country loses its comparative advantage

Question 15

cons of specialisation

Answer 15

• domestic industries forced to shut down as foreign firms can outcompete them
• overreliance on one industry - if that indsurty collapsed in a country would shock the economy and cause structural unemployment (this happens when they lose their comparative advantage)
• countries vulnerable to shortages of goods they don’t supply if producing countries stop trading with them
• country only skilled in one industry - causes labour immobility and falling skills in future reduced standard of living due to lower incomes
• developing countries will suffer if strictly follwoing comparative advantage e.g producing primary products like rice leads to weak econ gorwth as low value added

Question 16

criticise comparative advantage theory

Answer 16

• rate of inflation ignored
• no import controls
• no transport costs
• exchange rate movements ignored
  ^ above distorts comp advant
• r and d investment ignored
• ## non price competitiveness ignored

Question 17

TUTOR2U cons of specialisation

Answer 17

1) Job Displacement: Specialization can lead to job displacement in industries where a country does not have a comparative advantage, causing unemployment and social issues.
2) Dependency: Over-reliance on imports for critical goods can make a country vulnerable to supply disruptions or price fluctuations.
2) Income Inequality: While trade can benefit a nation as a whole, it may exacerbate income inequality if the gains are not equitably distributed.
3)Environmental Concerns: Specialization in resource-intensive industries may lead to environmental degradation if not regulated properly.
4) Trade Imbalances: Persistent trade deficits can lead to indebtedness and economic instability for some countries.
5) Loss of Domestic Control: Relying on imports for essential goods can compromise a nation’s control over its own economy and securit

Question 18

define comparative advatange

Answer 18

Comparative advantage occurs when a country can produce a good or service at a lower opportunity cost than another country.