Specialisation and Trade

Question 1

Absolute advantage

Answer 1

• occurs when a country can supply a product using fewer resources than another nation

Question 2

When does comparative advantage exist

Answer 2

• the relative opportunity cost of production for a good/service is lower in one nation than another
• a country is more productively efficient than another

Question 3

Key assumptions behind the theory of comparative advantage and trade

Answer 3

• constant returns to scale
• perfect factor mobility
• no trade barriers
• low transportation costs
• no significant externalities