4.1.2 Specialisation and trade

Question 1

What is absolute advantage?

Answer 1

a country has absolute advantage in the production of a good or service if it can produce it using ewr resources and at a lower cost.

Question 2

what is comparative advantage?

Answer 2

occurs when a country can produce a good or service at a lower opportunity cost than another country

Question 3

assumptions and limitations relating to the theory of comparative advantage

Answer 3

comparative advantage does not consider exchange rate when considering the cost of production for both countries

Question 4

advantages of specialisation and trade in an international context

Answer 4

1. greater world output (gain in economic welfare)
2. potentially higher quality, since production focuses on what people and businesses are best at
3. greater consumer choice
4. lower average costs since the market becomes more competitive
5. outward shift in the PPF curve
6. more opportunities for economies of scale

Question 5

disadvantages of specialisation ad trade in an international context

Answer 5

1. less developed countries might use up their non-renewable resources too quickly, so they might run out
2. countries could become over-dependent on the export of one commodity such as wheat.
3. there could be more structural unemployment, since population moves abroad
4. some countries might become stuck in the production of one good or service, so they cannot develop further