4.1.2 Specialisation And Trade ✅

Question 1

What is the theory of comparative advantage?

Answer 1

Countries find specialisation mutually beneficial if their opportunity cost of producing is different.
(Can produce a good more cheaply relative to others).

Question 2

What is absolute advantage?

Answer 2

When country can produce a good more cheaply.

Question 3

What does comparative advantage assume?

Answer 3

• Opportunity cost remains the same.
• Two countries and two goods.
• Perfect competition (no monopolies).
• Free trade (no trade barriers).
• Homogenous goods (same quality in both countries).

Question 4

Give me a neumerical example of comparartive advantage?

Answer 4

Question 5

If a country has absolute advantage in both goods should they still specialise?

Answer 5

Yes - still make higher quantity together.

Question 6

What diagram can show a competitive advantage? What shows the opportunity cost?

Answer 6

PPF
The gradient.

Question 7

Show me when country b has higher absolute cost advantage of both goods than A?

Answer 7

Question 8

Now draw a comparative advantage graph + show new PPF? (Both have opposite absolute advantages)

Answer 8

Question 9

What are the limitations of comparative advanatge theory?

Answer 9

• Impractical to assume constant opp costs + fixed resources.
• Ignores effects of economies of scale which can lead to more efficient production as scale increases.
• It is a long-term theory thus may not explain ST fluxuations.
• Distribution effects = may not be equally beneficial.

Question 10

What are advantages of specialisation and trade?

Answer 10

• Efficiency/productivity (allows countries to focus on producing what they are most effficient). = leads to econ growth
• Consumers benefit (wider variety of g/s + competitive prices) = imporves standards of living.
• Efficient resource allocation to g/s w a comparative advantage (reducing waste).
• Specialisation leads to larger production/economies of scale which can further reduce costs.

Question 11

What are disadvantages of trade and specialisation?

Answer 11

• Job displacement = certain indistries lose resources thus unemployed caused.
• Dependency = over reliant on imports for critical goods can make country vulnerable to supply + price flux’s.
• Income inequality = if gains aren’t equally distributed.
• Environmental concerns.

Question 12

Example of economy not benefiting due to not trading?

Answer 12

North Korea = stagnation issues.