Specialisation and Trade 4.1.2

Question 1

Define Comparative advantage

Answer 1

Countries should specialize where they can produce G/S at a lower opportunity cost than other countries

Question 2

Define Absolute advantage

Answer 2

Country’s ability to produce a G/S more efficiently than another country

Question 3

What does PPF stand for and what does a PPF show?

Answer 3

Production Possibility Frontier - shows the maximum potential output of the economy, using all resources efficiently

Question 4

What is the theory of comparative advantage

Answer 4

Global output will increase if countries produce the goods in which they have a comparative advantage leading to increased living standards

Question 5

What are the assumptions of the theory of comparative advantage

Answer 5

Average cost of production stays the same
No trade barriers
No transport costs

Question 6

What are the limitations of the theory of comparative advantage

Answer 6

Specialisation may increase the average cost of production
Trade barriers might reduce the benefit of comparative advantage
Transport costs might reduce the benefit of comparative advantage

Question 7

What are the advantages of specialisation and trade

Answer 7

Increased world output leads to increased living standards
Creates larger markets which leads to EOS
Lower prices and greater choice

Question 8

What are the disadvantages of specialisation and trade

Answer 8

Based on unrealistic assumption
Overdependence on imports/exports
Demotivation decreases productivity increases price