Econ theme 4 - Global Economy

Question 1

Absolute advantage

Answer 1

country’s ability to produce more of a good or service with the same amount of resources as another country.

Question 2

Comparative advantage

Answer 2

occurs when a country can produce a good at a lower relative opportunity cost compared to another country

Question 3

Theory of Comparative advantage

Answer 3

If countries specialise in the production of the goods in which they have a comparative advantage, global output will increase

Question 4

Assumptions the theory of comparative advantage makes

Answer 4

average cost of production is constant
no trade barriers
no transport costs

Question 5

Limitation of assumptions the theory of comparative advantage makes

Answer 5

Average cost of production is not constant
- specialisation can = DoE
- increase in cost of production

Trade barriers
- might distort comparative advantage

Transport costs
- might distort comparative advantage

Question 6

Specialisation (+/-)

Answer 6

+higher global output -> Increase in real GDP -> higher living standards
- based on unrealistic assumptions

+sell to international markets and benefit form EoS
- May lead to overdependence on imports/exports

+lower prices/more choice for consumers
- demotivation -> decreasing productivity -> increasing prices