Chapter 14.2

Question 1

Absolute advantage

Answer 1

The ability of one country to produce a good using fewer resources than another country

Question 2

Theory of absolute advantage

Answer 2

If countries specialize in and export the good in which they have an absolute advantage the result is increased production and consumption in each country

Question 3

Comparative advantage

Answer 3

The situation where one country has a lower opportunity cost in the production of a good than another country

Question 4

When does a country have a comparative advantage in the production of a good?

Answer 4

When it has a lower opportunity cost

Question 5

Theory of comparative advantage

Answer 5

As long as opportunity costs in two or more countries differ, it is possible for all countries to gain from specialization and trade according to their comparative advantage

Question 6

Trade liberalization

Answer 6

The freeing up of trade through gradual removal of trade restrictions

Question 7

Limitations of the theory of comparative advantage

Answer 7

Depends on many unrealistic assumptions
Specialization according to comparative advantage may not allow necessary structural changes to occur in an economy
Trade on the basis of comparative advantage may lead to excess specialization

Question 8

Assumptions made by the theory of comparative advantage

Answer 8

Factors of production are fixed
Technology is fixed
There is perfect mobility of factors of production within the country
There is full employment of all resources
There is free trade
There are homogenous products
Transportation costs are ignored