Comparative advantage 4.1.2

Question 1

Define perfect knowledge?

Answer 1

In theory it is assumed that consumers will always know the lowest prices, it’s not always true imperfect knowledge still exists.

Question 2

No transport costs?

Answer 2

It assumes that a country might have cost advantage in comparison to other countries. The efficiency is a lot better and lower prices but there might be huge transport costs for other countries to buy the product which will erode the advantage and make it less competitive

Question 3

Competition

Answer 3

If countries have comparative advantage they can exploit the advantage for a longer period of time, even if a country does not have comparative advantage they can still exploit economies of scale which would distort comparative advantage.

Question 4

Rates of inflation ignored?

Answer 4

Countries CA may be eroding if inflation rates are relatively high in the nation. let’s consider non-price competitive firms they might not have CA it may benefit like brand loyalty, innovation and tech which could lead them to dominate.

Question 5

How does Research and development impact comparative advantage

Answer 5

Each country has different levels of research and development so yes all countries will produce the same product but it may differ because it varies.