4.1.2 Specialisation and trade

Question 1

what’s an absolute advantage?

Answer 1

when a country can supply a product using fewer resources than another country

Question 2

what’s a comparative advantage?

Answer 2

when a country is/has
- the relative opportunity cost from one country is lower than another
- relatively more productively efficient than another
- specialise your scarce resources in making the goods you are relatively good at
➡️ more efficient allocation of resource

Question 3

what are the assumption behind comparative advantage?

Answer 3

• constant returns to scales (no economies of scale)
• perfect mobility between industries
• no trade barriers
• low transportation costs
• no significant externalities
  ➡️the model is a simplistic 2-country 2-product model, which in itself is unrealistic

Question 4

gains from trade?

Answer 4

• deeper specialisation and benefits from economies of scale
• trade increases market competition and choice and also drives up product quality for consumers
• reduced prices for consumers leading to higher real incomes
• better use of scarce resources for example from trade in sustainable technologies

Question 5

drawbacks of trade?

Answer 5

• carbon emissions from transport
• negative externalities from production and consumption
• risk of structural unemployment
• inequality
• risks from global shocks
• countries that specialise in only a few primary commodities may suffer from the natural resource trap