4.1.2. Specialisation and Trade

Question 1

What is a comparative advantage?

Answer 1

States a country should specialise in goods/services it can produce at lowest opportunity cost. This results in the volume or production increasing and excess production can be exported (Who gives up less to make something)

e.g. Country A= 10 cars pw + 5 computers pw
Country B= 6 cars pw + 6 computers pw

Country A gives up 2 cars to make 1 computer OC of 1 computer=2 cars
Country B gives up 1 car to make 1 computer OC of 1 computer=1 car

Country B has comparitive adv in making computer even though Country A has absolute adv in both cars and computers

Question 2

What is absolute advantage?

Answer 2

Country is able to produce a product using fewer factors of production than another country (Can make more with less)

e.g. If Country A can produce 10 cars using 10 workers and Country B can only produce 5 cars with 10 workers, Country A has absolute adv in car production and is more efficient at making cars

Question 3

What graph can be used to illustrate comparative and absolute advantage?

Answer 3

Production possibility frontiers

Question 4

What does a Production possibility frontier look like for comparative and absolute advantage?

Answer 4

Slide 3

Question 5

What are the limitations of comparative advantage?

Answer 5

-Specialisation creates dependence on other countries which creates vulnerability if something happens (over-dependence)
-Negative externalities of production can worsen quality of life (environmental damage)
-GDP/ capita likely to increase but distribution of extra income will be uneven (distribution of income)
-As countries specialise certain industries will shut down and result in unemployment

Question 6

What’s a real-life example of a country specialising in something (comparative adv)?

Answer 6

Brazil has ideal conditions for growing coffee (soil, climate, land etcc..) Can produce more efficiently at lower opportunity cost.
(Brazil specialises in Comparative adv)

Question 7

What are the advantages of international Specialisation and Trade?

Answer 7

1. Lower prices -comparative adv
2. Greater variety of goods/services -access products from all over world
3. More competition leads to better quality products
4. Economies of scale create efficiencies
5. Higher economic growth
6. Improved living standards- greater efficiencies and economic growth leads to raised living standards from higher income and more jobs

Question 8

What are the disadvantages of international Specialisation and Trade?

Answer 8

1. Global monopolies emerge- TNC’s can dictate prices
2. Exposure to external shocks- interdependence can develop with trade
3. Deficit on current account and balance of payments-some countries import more than export and cause deficit
4. Unemployment-firms that were successful in local market can fail in global market which can cause unemployment
   5.Dumping due to illegal government support- govt’s support key industries in forms like subsidies. This excess production is dumped on world markets at low prices
5. Challenges for developing countries- can be harder for start-up firms to compete
6. Over-specialisation in developing economies- developing countries lack finance to develop diversified product base and end up over-speiclaising in commodity products which makes countries GDP dependent on commodity prices
7. Loss of sovereignty and culture- languages and cultures have blended with the increase in trade as so countries lost some sovereignty

Question 9

What does sovereignty mean?

Answer 9

Decision making process and authority of the state. country’s right to control itself and make its own decisions, without anyone else telling it what to do. country has the power to make its own laws and rules. It has control over its land and resources. Other countries respect this right and don’t interfere in its affairs.