Specialisation and Trade Flashcards
Define absolute advantage
The ability to produce a good or service more efficiently than another country, using the same amount of resources.
Define comparative advantage
When a country can produce a good/service at a lower opportunity cost than another country.
Define the theory of comparative advantage
States that global output will increase if countries specialise in their comparative advantage.
Assumptions of comparative advantage
- Assumes no transportation, protectionism cost;
- factors perfectly mobile;
- cost of production stays constant, no economies of scale.
Limitations of comparative advantage
Limitations
1. Trade barriers exist, tariffs exist and transportation cost, flight cost, rail cost exists
- Some FOP cannot change (eg land) labour too specialised cannot be changed
- Increased specialisation might lead to higher average cost due to diseconomies of scale
Limitation of the comparative advantage theory
- Diseconomies of scale may occur
- Real life transport cost may distort cost
- Trade barriers exist
Disadvantages of specialisation and trade
- theory of specialisation and trade based on unrealistic assumptions
- overdependence on imports and exports (Bulgaria slow growth from russia war)
- diseconomies of scale from demotivation (alienated, bureacratic, poor communication -> price increase)
Advantages of specialisation and trade
- Higher standard of living
- rise in GDP from economies of scale
(more output to sell at international market -> trade surplus, AD - GDP) - Lower price and more choices for consumers