Comparative advantage Flashcards
Absolute advantage
When a country can produce more goods and services compared to another country using the same resources
Comparative advantage
A country such specialise in producing goods and services where they have a lower opportunity cost compared to the country and then trade
Absolute cost
Total costs of producing goods and services without considering any comparisons with or producers/countries
Relative cost
The cost of producing a good or service in a comparison to the cost of producing another good or service
Results of comparative advantage
-lower prices as countries are specialising in a certain good service and can produce more
-Maximum output
-allocative efficiency
Where does comparative advantage come from?
-Quantity and quality of factors of production
-Factor endowment and productivity
Assumptions of comparative advantage
-no transport costs
-Perfect information
-No economies of scale
-No RND/innovation
Reasons for trade patterns
-comparative advantage
-Trade blocks
-Protectionism
-Transport costs
-non-price factors
-Exchange rate
-Inflation rates
