international trade

Question 1

what does international trade do?

Answer 1

International trade decreases prices and increases the variety of goods/services available to a nation
This results in a higher standard of living

Question 2

what is comparative advantage

Answer 2

Comparative advantage is the theory which states that a country should specialise in the goods/services that it can produce at the lowest opportunity cost
By specialising, the volume of production increases
Excess production can be exported
Goods/services which are not produced in the country can be imported

Question 3

what are the assumptions of comparative advantage ?

Answer 3

Transport costs are zero: it does not account for moving goods or services between countries. Depending on a nation’s location, this is more or less of a problem
There is perfect knowledge: each country knows what it has a comparative advantage in and also the comparative advantages of other countries
Factor substitution is easily achieved: economies can quickly adjust to changing global market conditions by switching from capital to labour - and vice versa
Constant costs of production: the theory does not take into account the economies of scale that can be achieved with an increase in output

Question 4

what is absolute advantage ?

Answer 4

Absolute advantage occurs when a country is able to produce a product using fewer factors of production than another country
A country may well have absolute advantage but still not have comparative advantage
It should produce goods/services in which it has comparative advantage
Production possibility frontiers can be used to illustrate comparative and absolute advantage

Question 5

what does comparative advantage show ?

Answer 5

Comparative advantage shows that by specialising, the volume of production increases
Resulting in a large increase in the volume of overall global trade