Comparative advantage (unfinished)

Question 1

What does the theory of comparative advantage state?

Answer 1

If all countries specialise in producing the goods they can make the most efficiently then the world output will be maximised and every country will benefit.

Question 2

Why might one country be able to produce a product better than another? (2 Reasons)

But what happens in reality?

Answer 2

1. Natural Advantage - They have the right naturally occuring resources in their country to make it most efficiently. (e.g - India’s tea and Kuwait’s oil supply)
2. Acquired Advantage - They have built up the skills, technology and expertise in producing and supplying those products over a long period of time which gives them an advantage over other countries. E.g- German engineering, UK financial services, USA film and silicone valley IT.

In reality these two things often go together, for example France and wine, they have the climate but have also been building up their expertise for centuries.

Question 3

What are the 5 assumptions the theory is based on?

Answer 3

1. Resources (workers) are perfectly mobile within countries but not between countries, that means it’s fairly easy to switch between different products if they want to.
2. No transport costs between countries
3. No tarrifs or other restrictions
4. Constant returns to scale in all industries within a country, whatever you do to the size of the industry the output will increase by the same amount.
5. Full employment of resources in each country (not even frictional unemployment).

Question 4

Give an example of two countries before and after specialisation, producing two goods

Answer 4

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Question 5

Show the impact of specialisation on a ppf

Answer 5

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