Macro A2 - Specialisaion & Trade Flashcards
Absolute advantage
When a country is able to produce a product using fewer factors of production than that of another country.
Comparative advantage
The theory that a country should specialise in the goods/services that it can produce at the lowest opportunity cost.
Assumptions and limitations relating to the theory of comparative advantage
The comparative advantage theory doesn’t take into account economies of scale. For example, the country which doesn’t have the comparative advantage in a certain good/service may be able to exploit economies of scale to a much greater extent than the country with the comparative advantage. Therefore, they may end up being able to sell the good/service at a lower price than the country with the comparative advantage, due to the price saving gained through large economies of scale.
Advantages of specialisation and trade in an international context
Consumers have much more choice of goods/services. In addition to this, comparative advantage allows countries to specialise in the good/service that they can produce at the lowest opportunity cost.
Firms have access to much larger markets. This will increase the demand that there is for the goods/services that they produce. As a result of this, they are able to increase their output and benefit from economies of scale. Overall, this causes a decrease in their average costs which they can then pass onto consumers in the form of lower prices.
Disadvantages of specialisation and trade in an international context
Countries that do not have a comparative advantage will suffer from low export revenue and relatively high import expenditure. As a consequence of this, they are likely to experience large trade deficits, thus reducing aggregate demand and economic growth rates.
The risk of foreign firms dumping goods/services domestic markets. This causes a large increase in the supply of the good/service, thus causing prices to fall.
