4.1.2 Specialisation And Trade

Question 1

Absolute advantage

Answer 1

The ability to produce goods/services at a lower price i.e. with fewer resources
- Absolute advantage exists when a country can produce a good more cheaply in absolute terms than another country.

Question 2

Comparative advantage

Answer 2

The ability of a country to produce goods/services at a lower opportunity cost.
- The theory of comparative advantage states ​that countries find specialisation mutually advantageous if the opportunity costs of production are different​. If they are the same, there will be no gain from trade. ​
Comparative advantage ​exists when a country is able to produce a good more cheaply relative to other goods produced.

Question 3

Comparative advantage assumptions/limitations

Answer 3

Assumes:
- No transport costs… which could lower or prevent any comparative advantage
- Homogenous products… as well as being unlikely, it makes it difficult to conclude that country has a comparative advantage as their products can’t be perfectly compared
- No economies of scale/Costs are constant…
economies of scale help to increase the gains from specialisation
- Comparative advantage is constant…
it could change over time e.g. due to climate change/ change in investment and specialist knowledge
- Factors of production are perfectly mobile​, there are no tariffs or other trade barriers and there is perfect knowledge.
Limitation:
Whether trade takes place will depend on the ​terms of trade​ between the countries.

Question 4

Advantages of specialisation and trade

Answer 4

• Increase in global economic growth (comparative advantage shows how world output can be increased if countries specialise in what they are best at producing)
• Trading and specialising allows countries to benefit from economies of scale which reduces costs and therefore decreases prices globally
• Different countries have different factors of production and so trade allows countries to make use of factors of production, or the things produced by these factors, which they otherwise may have been unable to
• Trade enables consumers to have greater choice about the types of goods they
  buy, and so there is greater consumer welfare/utility
• Trade also means there is greater competition, which provides an incentive to
  innovate. This creates new goods and services and new production methods, increasing consumer welfare and lowering costs respectively.
• Economic growth (countries which isolate themselves for political reasons e.g. North Korea have found their economies tend to stagnate)

Question 5

Disadvantages of specialisation and trade

Answer 5

• Trade can lead to over-dependence, where some countries become
  dependent on particular exports whilst others become dependent on particular imports. This can cause problems if there are large price falls in the exports of if
  imports are cut for political reasons e.g. war
• It can cause structural unemployment as jobs are lost to foreign firms who are more efficient and competitive; the less mobile the workforce the higher the chance that changes in demand due to trade will reduce output and employment over long
  periods of time e.g. this is a big problem in the UK as some areas e.g. Manchester suffer from unemployment as their traditional industries declined e.g. ship-building.
• The environment will suffer due to the problems of transport as well as the increased demand for resources e.g. deforestation
• Countries may suffer from a loss of sovereignty due to signing international treaties and joining trading blocs e.g. in the EU
• They may see a loss of culture as trade brings foreign ideas and products to the
  country