4.1.2 - specialisation and trade Flashcards
What is absolute advantage?
When economy A can produce more of X than economy B from the same quantity of FOPs
How can you show absolute advantage numerically?
eg. The same FOPs could be used by the UK to produce 1000 of X or 800 of Y. The same FOPs could be used by Japan to produce 2400 of X or 500 of Y.
-draw two linear PPFs showing the maximum amount of goods that could be produced by each economy (double the original amount).
-the UK has absolute advantage of Y and Japan has absolute advantage of X.
What is comparative advantage?
The ability of one economy to produce X at a lower opportunity cost than another economy.
What are gains from trade?
The increase in output following specialisation and trade, they occur when there are differences in the opportunity cost ratios.
How can you show comparative advantage numerically?
-draw linear PPF for both economies using data from the table
-calculate opportunity cost (the amount of one good produced/the amount of the other good produced)
-figure out who was comparative advantage for each good/service based on which economy has the lowest opportunity cost
-annotate the diagram to show the new level of production after specialisation
-draw new table showing new levels of production and calculate the gains from trade
What are the assumptions of comparative advantage?
-no transport costs
-costs are constant and there are no economies of scale
-only 2 producers and only 2 goods/services
-FOPs are perfectly mobile
-goods are homogenous
-no tariffs or trade barriers
-perfect knowledge
-linear PPF = constant returns
What are the advantages of specialisation and trade?
-lower prices and more consumer choice
-larger markets and economies of scale for firms
-higher economic growth and living standards due to the law of comparative advantage
What are the disadvantages of specialisation and trade?
-deficit on the trade of goods and services balance may arise if g/s are uncompetitive
-danger of dumping by foreign firms, eg. selling at below average cost
-increased unemployment
-increased economic integration may result in exposure to external shocks
-unbalanced development - only those industries in which the country has comparative advantage in are developed while the rest do not benefit
-global monopolies occur as global TNCs become larger
-developing and emerging economies may face problems eg. infant industries may be unable to compete
What is one limitation of the theory of comparative advantage?
External costs of production, such as environmental degradation, are nor accounted for
