Specialisation and trade 4.1

Question 1

Absolute advantage

Answer 1

When Country A can produce a good with fewer factors of production than Country B

Question 2

Comparative advantage theory

Answer 2

Devised by David Ricardo.

Argues that countries should specialise in good & services it can produce with the lowest opportunity cost, then trade with other ountries

Question 3

Comparative Advantage Def.

Answer 3

When a country is able to produce a good more cheaply relative to other goods produced

Question 4

Advantages and Disadvantages of Trade and Specialisation

Answer 4

Advantages Choice and Competition Economies of Scale Higher Global GDP Countries who isolate themself tend to stagnate, like North Korea Disadvantages Risk of Structural Unemployment Increased inequality due to outsourcing Dependence on foreign countries (german car industry suffered due to financial crisis) Loss of sovereignty, this was one of the main arguments for leaving the EU

Question 5

Limitations to Theory of Comparative Advantage 5

Answer 5

Transport costs - may offset lower opportunity cost of importing

Externalities - Pollution

Can result in structural unemployment - In the areas that they produce less of

Assumes there are no tariffs

Demand for a good cannot be met by a single country

Political factors - may not want to rely on potential enemy for goods

Question 6

Comparative Advantage Diagram

Answer 6

China has the comparative advantage in manufactured goods, USA in software. New PPF can be drawn between the two points showcasing how both nations have benefitted from trade

To find who has comparative advantage when given figures, draw a CA PPF diagram. Find the axis with the biggest gap between the two country’s production (China in Manufactured Goods in this case), that country has the comparative advantage in that good, the other country has comparative advantage for the other good