Specialisation and trade

Question 1

Absolute advantage ?

Answer 1

The ability of a country to produce more of a good than another country with the same resources

Question 2

Comparative advantage

Answer 2

The ability of a country to produce at a lower opp cost than another country .

Question 3

Economies of scale

Answer 3

The reduction in average costs due to increased production levels / output

Question 4

PPF

Answer 4

Maximum potential output of two goods.

Question 5

Assumptions of Theory of Comparative Advantage

Answer 5

• It assumes that the average costs due to of production is constant
• There are no trade barriers
• no transport costs

Question 6

Limitations of ToCA

Answer 6

Increased specialisation might result in increasing average costs by diseconomies of scale

Trade barriers might distort comparative advantage

Real world transport costs may distort comparative advantage

Question 7

Advantages of Specialisation and Trade

Answer 7

Lead to higher world output and therefore higher living standards

May create economies of scale - increased quantity of production

Can lead to lower prices and more choices for consumers

Question 8

Disadvantages of Specialisation and Trade

Answer 8

They are based on unrealistic assumptions
- Average cost of production remains constant
- There are no trade barriers
- There are no transport costs

May lead to overdependence on imports and exports and slow down economic growth

lead to demotivation and decrease in productivity as well as an increase in price.