4.1.2 - Specialisation & Trade

Question 1

What Does International Trade Do?
(3 Points)

Answer 1

~ Decreases prices.

~ Increases the variety of goods and services available to a nation.

~ Results in a higher living standard.

Question 2

What Is Absolute Advantage?

Answer 2

When a country is able to produce a product using fewer factors of production than other countries.

Question 3

What Is Comparative Advantage?

Answer 3

States that a country should specialise on the goods and services that it can produce at the lowest opportunity cost.

Question 4

What Are The Assumptions Of Comparative Advantage?
(4 Points)

Answer 4

~ Transport costs are zero.

~ There is perfect information.

~ Factor substitution is easily achieved.

~ Constant costs of production.

Question 5

One Assumption Of Comparative Advantage Is Transport Costs Are Zero, What Does This Mean?

Answer 5

It does not account for the moving goods and services between countries.

Question 6

One Assumption Of Comparative Advantage Is There Is Perfect Information, What Does This Mean?

Answer 6

Each country knows what it has a comparative advantage in and also the comparative advantage of other nations.

Question 7

One Assumption Of Comparative Advantage Is Factor Substitution Is Easily Achieved, What Does This Mean?

Answer 7

Economies can quickly adjust to changing global market conditions by switching from capital to labour.

Question 8

One Assumption Of Comparative Advantage Is Constant Costs Of Production, What Does This Mean?

Answer 8

The theory does not take into account the economies of scale that can be achieved with an increase in output.

Question 9

What Are The Limitations Of Comparative Advantage?
(4 Points)

Answer 9

~ Over-dependence.

~ Environmental damage.

~ Uneven distribution of income.

~ Structural unemployment

Question 10

One Limitation Of Comparative Advantage Is Over-Dependence, What Does This Mean?

Answer 10

Specialisation creates a dependence on other countries, generating vulnerability.

Question 11

One Limitation Of Comparative Advantage Is Environmental Damage, What Does This Mean?

Answer 11

The impact of negative externalities are not considered by the theory, which significantly worsens the quality of life in towns, cities and countries.

Question 12

One Limitation Of Comparative Advantage Is Uneven Distribution Of Income, What Does This Mean?

Answer 12

When GDP per capita increases the distribution of income is likely to become uneven with wealthier sections of the population gaining more.

Question 13

One Limitation Of Comparative Advantage Is Structural Unemployment, What Does This Mean?

Answer 13

As countries specialise certain industries are likely to shut down, resulting in unemployment.

Question 14

What Are The Advantages Of International Specialisation & Trade?
(6 Points)

Answer 14

~ Lower prices.

~ Greater variety of goods and services.

~ More competition leads to better quality products.

~ Economies of scale creates efficiencies.

~ Higher economic growth.

~ Improved living standards.

Question 15

What Are The Disadvantages Of International Specialisation & Trade?
(8 Points)

Answer 15

~ Global monopolies emerge.

~ Exposure to external shocks.

~ Current account deficit.

~ Unemployment.

~ Dumping due to illegal government support.

~ Challenges for developing countries.

~ Over-specialisation in developing economies.

~ Loss of sovereignty and culture.

Question 16

What Is Dumping?

Answer 16

When a manufacturer lowers the price of an item entering a foreign market to a level that is less than the price paid by domestic customers in the originating country.