Micro L2

Question 1

Factor endowment:

Answer 1

Amount of land, labour, capital and entrepreneurship that a country possesses and can exploit for production

Question 2

Product differentiation:

Answer 2

Process of distinguishing a product or service from others to make it more attractive to a target market

Question 3

3 main reasons countries trade with one another:

Answer 3

1) Different factor endowments
2) Price
3) Product differentiation

Question 4

What industries does the UK specialise in?

Answer 4

Finance, law and pharmaceuticals

Question 5

Assumptions made by theory of absolute & comparative advantage:

Answer 5

1) Both countries have an equal amount of resources
2) Both countries are capable of producing 2 goods

Question 6

When is a country said to have absolute advantage?

Answer 6

• If it can produce more of a good, using equal amount of resources than another country eg Country A has an absolute advantage over Country B as it produces 30 tomatoes compared to Country B’s 20 (using the same amount of resources)
• If it has a higher cost per unit in worker hours (more efficient)

Question 7

Theory of comparative advantage:

Answer 7

Specialisation and trade can be mutually beneficial even if one country has an absolute advantage in producing both goods

Question 8

Calcuation for comparative advantage:

Answer 8

1) Calculate opportunity cost for each good and country (calculate ratio 1:x)
2) Country with lowest opportunity cost for each good has comparative advantage

Question 9

What foed the principle of comparative advantage hold?

Answer 9

1) Specialise in the good where you have lowest relative opportunity cost
2) Trade with another countrh to obtain the good they don’t produce

Question 10

Trade possibility frontier:

Answer 10

Exchange rates which allow mutually beneficial trade to take place

Question 11

Assumption of theory of comparative advantage:

Answer 11

• No transportation costs
• Perfect information
• Mobile factors of production –> can easily be switched from producing one good to another
• Cost of production is constant
• No external production costs
• No barriers to trade

Question 12

Advantages of specialisation and trade:

Answer 12

1) Can focus on goods and services they have comparative advantage inb
2) Wide range of goods and services for consumers
3) Opens domestic producers to international competition, allowing consumers lower prices and higher quality
4) Trade provides larger market for firms

Question 13

Disadvantages of specialisation and trade:

Answer 13

1) Overreliance on small number of industries
2) Countries become vulnerable to geopolitical change
3) Structural unemployment is possible when a country loses its comparative advantage
4) Strict adherence to principle of comparative advantage may be poor development strat