4.1.2 specialisation and trade Flashcards
What is the theory of comparative advantage?
what are 2 limitations of the theory of comparative advantage
Countries find specialization mutually advantageous if the opportunity costs of production are different. If opportunity costs are the same, there will be no gain from trade.
-comparative advanatge assumes there are no transport costs, these could lower/prevent comparative advantage
-assumes that costs are constant, there are no economices of scale. economies of scale can increase the gains derived from specialisation.
What is absolute advantage?
When a country can produce a good more cheaply in absolute terms than another country.
This concept focuses on the cost of production without considering opportunity costs.
What is comparative advantage?
When a country is able to produce a product at a lower opportunity cost than another
True or False: Comparative advantage requires that opportunity costs of production are the same for all countries.
False
Comparative advantage exists only when opportunity costs are different.
what is the formula for comparative advantage
loss/gain
what are 3 advantages of specialisation and trade
what are 3 disasvantage of specialisation and trade
-increased world output if counries sepcialise at what they are best at producing, this will increase global economic growth.
-trade enables customer to have greater choice in the types of goods they buy, and so there is greater consumer welfare
-trade also means that there is greater competition, providing incentives to innovate. this creates new g/s , increasing consumer welfare and also new prodcutive methods, which lower costs
disadv:
-can lead to over-dependency on a particular good/service. both on imports and exports.
-can cause structural unemployment, as jobs are lost to foreign firms who are more efficient and productive.
-the environemnt will suffer due to the transportation as well as the increased demand for resources, e.g. mining and deforestation.
