Comparative Advantage

Question 1

Comparative advantage

Answer 1

Where a country can produce a product at a lower opportunity cost than another country

Opportunity cost: the cost of sacrificing the production of the next best alternative

Question 2

Limitations

Answer 2

It does not address whether products made based on comparative advantage rather than absolute advantage can be:

• Competitive on global markets
• Substantial or not
• Whether trade benefits will be distributed fairly between participating countries

Question 3

Assumptions

Answer 3

• Two countries, producing two goods
• The size of the economies is equal
• There are constant returns to scale
• No trade barriers
• Transport costs are ignored
• Before specialisation (closed economy) countries’ resources are equally divided to produce each good

Specialisation: enable increasing efficiency through economies of scale

Question 4

How to calculate opportunity cost

Answer 4

what we are giving up/ what we want to produce