Specialisation and Trade

Question 1

What is absolute advantage

Answer 1

When a country can produce a good using less resources in comparison to another country

Question 2

What is comparative advantage

Answer 2

When a country can produce a good at a lower opportunity cost in comparison to another country

Question 3

What is the theory of comparative advantage

Answer 3

If countries specialise in the goods for which they have comparative advantage, real world output will increase

Question 4

Assumptions of the theory of comparative advantage

Answer 4

-Average costs are constant
-No trade barriers
-No transport costs

Question 5

Limitations of the theory of comparative advantage

Answer 5

-Over-production can lead to diseconomies of scale
-Transport costs can distort comparative advantage
-Trade barriers can distort comparative advantage

Question 6

Advantages of specialisation in trade

Answer 6

-Increased variety/choice for consumers
-Specialisation could lead to economies of scale and lower prices
-Greater competition leads to more innovative products
-increased output,due to higher efficiency

Question 7

Disadvantages of specialisation in trade

Answer 7

-Over-specialisation makes it difficult for employees to find new jobs,leading to structural unemployment
-over dependence on imports/exports
-If a country specialises in natural resources,their reserves may become depleted in the future
-Due to a chance of strikes,it makes people vulnerable