4.1.2 Specialisation + Trade

Question 1

What is specialisation?

Answer 1

When an individual, firm, region or country concentrates on the production of a limited range of goods and services.

Question 2

What is absolute advantage?

Answer 2

When a country can produce more of a good/service compared to another country using the same quantity of factors of production.

Produce more cheaply.

Question 3

What is comparative advantage?

Answer 3

A country should specialise in goods/services that they can produce at a lower opportunity cost compared to another country.

Question 4

What are the assumptions of comparative advantage?

Answer 4

• Transport costs are zero
• Perfect knowledge
• Factor substitution is easily achieved
• Constant costs of production

Question 5

Transport costs are 0?

Answer 5

• It doesn’t account for moving the goods/services between countries.
• Depending on a nation’s location, this is more or less of a problem.

Question 6

Perfect knowledge?

Answer 6

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

Question 7

Factor substitution is easily achieved?

Answer 7

• Economies can quickly adjust to changing global market conditions by switching from capital to labour and vice versa.

Question 8

Constant costs of production?

Answer 8

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