Absolute and Comparative Advantage Flashcards
1
Q
Definition of Absolute Advantage
A
An economy can produce a greater quantity of goods for the same quantity inputs
2
Q
Assumptions for Absolute Advantge
A
Factors of production cannot move between countries
Free trade
Constant returns of scale
Export = Import
3
Q
Definition of Comparative Advantage
A
A country should specialize in goods or services it can produce at the lowest opportunity cost, and trade with another country
4
Q
Assumptions of Comparative Advantage
A
There are only 2 countries
Factors of production are fully employed
Free trade
Rate of inflation ignored
5
Q
Free Trade Definition
A
Trading between countries without any barriers
6
Q
Gains of Free Trade
A
Lower prices
- competitiveness (high international competition, efficient, low cost, low price)
- economy of scale (firms supply more output, less average cost)
- technology transfers (high efficiency, high investment, low price)
Access to goods that couldn’t be produced domestically
- import to satisfy demand
- good for both consumer and producers
- Producer: import raw materials
- Consumer: greater choice
High efficiency
- Improve allocation of world resources
- specialize and produce goods with opportunity cost advantage
