4.2.1 Specialisation and Trade

Question 1

Define law of comparative advantage

Answer 1

This states that a country should specialise in the good which they have the least opportunity cost.

Question 2

Define absolute advantage

Answer 2

When one country can produce at a lower cost than another country

Question 3

Benefits of specialisation

Answer 3

• You are able to maximise output / become more efficient
• Can benefit from economies of scale
• Can produce more and increase standards of living

Question 4

Disadvantages of specialisation

Answer 4

• You may get diseconomies of scale
• Makes you vulnerable if you are not producing if you don’t produce strategic goods such as food
• Structural unemployment if the comparative advantage changes over time
• Costs of transport may make trade too expensive

Question 5

Use comparative advantage to explain the benefits of specialisation and trade

Answer 5

The benefit of trade of trade is that it allows countries to specialise in a good they have a comparative advantage in. This means that world output can increase as countries specialise in goods that they efficient at producing.

Question 6

What assumptions does the theory of comparative advantage make

Answer 6

• Assumes no diseconomies of scale
• No transport cost
• No externalities

Question 7

How useful is this theory at explaining the benefits of trade (my opinion)?

Answer 7

This theory is effective as it simply explains how trade and specialisation works. However, it is just a theory so everything that is analysed and compared using this model needs to be taken with a pinch of salt.