4.1.2: Specialisation & Trade

Question 1

What is absolute advantage?

Answer 1

When a country produces a good at a cheaper rate in absolute terms than another nation.

Question 2

What is comparative advantage?

Answer 2

When a country is able to produce a good at a cheaper rate relative to other goods produced.

Question 3

Numerical analysis of absolute advantage & comparative advantage:

Answer 3

Question 4

Diagrammatic analysis of absolute advantage & comparative advantage:

Answer 4

Question 5

What are assumptions and limitations of the theory of comparative advantage?

Answer 5

-Assumes there are no transport costs.
-Oversimplifies the global trade market.
-Doesn’t consider the exchange rate when considering the cost of production for both countries (e.g. if the price of one good increases, it is more worthwhile to produce that good).

Question 6

What are advantages of trade in an international context?

Answer 6

-Greater world output, so there is a gain in economic welfare.
-More competitive markets, reducing average costs and prices.
-Greater consumer variety.

Question 7

What are disadvantages of trade in an international context?

Answer 7

-Product dependancy.
-Structural unemployment, as production moves abroad.
-Environment will suffer due to increased transport.