Specialisation and Trade

Question 1

Absolute Advantage

Answer 1

When country can produce a product with fewer FoP than another nation

Question 2

Comparative Advantage

Answer 2

Countries should strive to specialise in goods or services it can produce the LOWEST opp. cost

Question 3

Assumptions for CA

Answer 3

Perfect Knowledge
No Transport Costs
No EoS
Rate of Inflation ignored
No Import Controls 
Non price competitiveness ignored 
Exchange rate movement ignored
R&D investment ignored

Question 4

Why is Perfect Knowledge an assumption?

Answer 4

Consumers may not always know about the lowest prices, or may not always buy this.

Question 5

Why is ‘No Transport Costs’ a assumption?

Answer 5

It may be expensive to ship the goods to other nation, therefore eroding at the CA, making the nation less competitive.

Question 6

Why is ‘no EoS’ an assumption?

Answer 6

If a country has no CA, they can still exploit EoS, thus distorting CA as EoS does not rely on FoP.

Question 7

Why is Rate of inflation an assumption?

Answer 7

CA may be eroded if high inflation.

Question 8

Why is No Import Control an assumption?

Answer 8

Tariffs/taxes may drive prices up, eroding at the CA.

Question 9

Why is Exchange Rate Fluctuation an assumption?

Answer 9

Strong currencies will erode at the CA as it is more expensive to buy the product therefore less likely to buy.

Question 10

Why is Non Price Competitiveness a factor of the CA?

Answer 10

Factors like quality or customer service may influence consumers to keep purchasing, even though price may not be the lowest.