Specialisation and Trade Flashcards
What is absolute advantage?
When a country can produce a good at a lower cost per unit than another country.
What is comparative advantage?
When a country can produce a good more cheaply relative to other goods produced domestically (when the opportunity cost of a country producing a good is lower than the opportunity cost for another country).
What is specialisation (in regards to countries)?
The focusing of production on goods/services that the country has an advantage in producing.
What are the 5 assumptions of comparative advantage?
1) Constant costs of production, with no economies or diseconomies of scale.
2) Transport costs are zero.
3) Perfect knowledge exists.
4) Factors of production are perfectly mobile, and can easily be switched from producing one good to another.
5) No trade barriers, such as tariffs.
What are 3 limitations of the theory of comparative advantage?
1) Transport costs exist, potentially outweighing a country’s comparative advantage.
2) Increased specialisation can lead to larger firms, potentially causing diseconomies of scale.
3) Governments may introduce tariffs or other barriers to trade.
What are 3 advantages of specialisation and trade (1 each for countries, consumers and firms)?
1) Lower prices and greater choice for consumers, due to greater competition.
2) Countries gain access to goods/services they otherwise would not be able to produce or have access to.
3) Free trade encourages competition, leading to increased innovation and investment by firms.
What are 6 drawbacks of specialisation and trade?
1) Risk of dumping by foreign firms.
2) Increased unemployment due to dumping and competition.
3) Increased economic integration makes countries potentially more exposed to external shocks.
4) Growing influence of global monopolies can lead to higher prices.
5) Environmental degradation, due to increased transportation and depletion of natural resources.
6) Developing and emerging economies, and their firms, may be unable to compete, potentially due to the monopsony power held by large global firms.
What is dumping?
The exporting of a good to a foreign market at below cost, putting firms and industries out of business.
