Comparative and Absolute Advantage

Question 1

Absolute advantage

Answer 1

A country has absolute advantage in the production of a good or service if it can produce it using fewer resources and at a lower cost than another country

Question 2

Comparative advantage

Answer 2

Occurs when a country can produce a good or service at a lower opportunity cost than another country. They can give up producing less of another good than another country, using the same resources

Question 3

Example -
Country A can produce 30 units of wine and 10 units of wheat with their resources, and country B can produce 32 units of wine and 20 units of wheat

Answer 3

Country B has an absolute adv. in producing both products. Country B should produce wheat and country A should produce wine. The opportunity cost of production is reflected in the gradient of the PPF. If more of one good is produced, less of the other good can be produced.

Question 4

Assumptions and Limitations

Answer 4

The theory of comparative advantages assumes a perfectly competitive market. In reality,
this is likely to be different, which results in the full benefit of specialisation not happening.
Specialising fully could also lead to structural unemployment, since workers might not gain
the transferable skills they need to change between sectors, or they are simply unable to
change
Comparative advantage does not consider the exchange rate when considering the cost of
production for both countries. Therefore, if the price of one good increase, it is more worthwhile producing that good, even if the country has a comparative advantage in the
other good
Countries can develop an advantage in the production of a good, such as Vietnam in the
production of coffee. It is the largest coffee supplier to the UK and, over the last 30 years, it
has become one of the world’s largest coffee producers. During this period, Vietnam’s
market share increased from 1% to 20%
Moreover, comparative advantage is derived from a simple model with two countries; the
global trade market is significantly more complex than this.
It can be argued that comparative advantage is no longer a relevant concept. Countries do
not only produce a handful of goods and services, like the theory suggests. Rather, a wide
variety of goods and services are produced, and there is very little specialisation. This is
helped by the advancement of technology

Question 5

Advantages of specialisation and trade in an international context

Answer 5

Greater world output so gain in economic welfare
Potentially higher quality since production focuses on what people and businesses are best at
Greater variety of goods and services
Lower average costs due to competition
Increased supply of goods
Outward shift of PPF
More opportunities for economies of scale

Question 6

Disadvantages of specialisation and trade in an international context

Answer 6

Less developed countries might use up non-renewable resources too quickly, so they might run out