4.1.2: Specialisation and Trade

Question 1

What is comparative advantage?

Answer 1

• when one country can produce a good or service at a lower opportunity cost than another.
• This means that country can produce goods relatively cheaper than others

Question 2

What is absolute advantage?

Answer 2

• When an economy/ country can produce a good more cheaply in absolute terms than another country
• Means that fewer resources are needed to produce the same amount of goods and there will be lower costs than other economies

Question 3

What are some assumptions and limitations of the theory?

Answer 3

• Comparative advantage assumes there are no transport costs, yet these could lower or prevent any comparative advantage.
• It also assumes costs are constants and that there are no economies of scale; economies of scale help to increase the gains from specialisation
• The model assumes that goods are homogenous, which may not be true in real life. This makes it difficult to see if a country has comparative advantage, as products can’t be perfectly compared.

Question 4

What are some advantages of specialisation and trade?

Answer 4

• Increase in global economic growth: comparative advantage shows how world output can be increased, if countries specialise in what they are best at producing
• Lower production costs and prices globally: trading and specialising allows countries to benefit from economies of scale
• Greater consumer welfare: Trade enables consumers to have greater choice about the types of goods they buy

Question 5

What are some disadvantages of specialisation and trade?

Answer 5

• Over-dependence: Some countries become dependent on particular exports or imports. Can cause depletion in countries’ natural resources and it can be high risk as a country may cut their imports due to political reasons
• Structural Unemployment: Jobs may be lost to foreign firms who are more efficient and competitive.
• The less mobile the workforce, the higher chance that changes in demand due to trade will reduce output and employment over long periods of time.
• Example: The UK, regions such as Manchester suffer from unemployment as their tradition industries declined like ship building