4.1.2 Specialisation & Trade Flashcards
What is the theory of comparative advantage?
The theory of comparative advantage states that countries find specialisation mutually advantageous if the opportunity costs of production are different.
When does absolute advantage exist?
Absolute advantage exists when a country can produce a good more cheaply in absolute terms than another country.
When does comparative advantage exist?
Comparative advantage exists when a country is able to produce a good more cheaply relative to other goods produced.
What assumption does the theory of comparative advantage make regarding transport costs?
The theory assumes there are no transport costs, which could lower or prevent any comparative advantage.
How do economies of scale impact the theory of comparative advantage?
Economies of scale help increase the gains from specialization, although the theory assumes costs are constants and there are no economies of scale.
Why is the assumption of homogeneous goods considered a limitation?
Goods in the model are assumed to be homogeneous, which is unlikely to hold in real life, making it difficult to conclude that a country has a comparative advantage.
What assumption is made about factors of production in the theory of comparative advantage?
The theory assumes factors of production are perfectly mobile, which may not hold true in reality.
What factors influence whether trade takes place according to the theory of comparative advantage?
Whether trade takes place depends on the terms of trade between countries, another assumption of the theory.
How does comparative advantage contribute to global economic growth?
Comparative advantage shows how world output can increase if countries specialize in what they are best at producing, leading to increased global economic growth.
What advantage do economies of scale bring to trade?
Trading and specializing allows countries to benefit from economies of scale, which reduce costs and therefore decrease prices globally.
How does trade enable countries to make use of factors of production?
Different countries have different factors of production, and trade allows countries to make use of factors of production, or the things produced by these factors, which they otherwise may have been unable to.
How does trade benefit consumer welfare?
Trade enables consumers to have greater choice about the types of goods they buy, leading to greater consumer welfare.
What incentive does competition provide according to the theory of specialisation and trade?
Trade provides greater competition, which creates an incentive to innovate, leading to the creation of new goods and services and new production methods.
What problem can over-dependence on particular exports or imports cause?
Over-dependence on particular exports or imports can lead to problems if there are large price falls in the exports or if imports are cut for political reasons.
How does trade contribute to structural unemployment?
Trade can cause structural unemployment as jobs are lost to foreign firms that are more efficient and competitive, particularly affecting areas with less mobile workforces.
