Specialisation and Trade Flashcards
Comparative advantage
A country has a comparative advantage in the production of a good if they can produce it at a lower opportunity cost than another country
Theory of Comparative Advantage
If countries specialise in the production of the goods in which they have a comparative advantage, global output will increase.
The average cost of production can rise when specialisation in production leads to
diseconomies of scale
Assumptions of the Theory of Comparative Advantage
The assumptions of the theory of comparative advantage are that average costs remain constant; there are no trade barriers and no transport costs.
Limitations of the Theory of Comparative Advantage
The limitations of the theory of comparative advantage are that diseconomies of scale increase average costs; there are trade barriers such as tariffs and there are transport costs when trading.
How does the average cost of production remains constant.
The first assumption is that the average cost of production remains constant. This means that the theory assumes there are no economies or diseconomies of scale.
How can specialisation increase the average cost of production.
The first limitation of the theory is that specialisation can lead to an increase in the average cost of production as output increases due to diseconomies of scale. This suggests that specialising according to comparative advantage may have disadvantages.
The Theory of Comparative Advantage
The Theory of Comparative Advantage states that global output will increase if countries specialise in the production of the goods in which they have a comparative advantage.
What is it called when one country or producer can produce a good at a lower opportunity cost than another?
comparative advantage
What is the logical economic conclusion to any economic growth
living standards increasing/decreasing
economies of scale
Economies of scale occur when long run average costs decrease as output increases.
How does a diseconomies of scale occur?
wen an increase in output leads to an increase of long run average costs
Advantages of Specialisation and Trade
- Leads to an increase in global output and living standards
- May create economies of scale
- Can lead to lower prices and more choice for consumers
Disadvantages of Specialisation and Trade
- Benefits are based on unrealistic assumptions
- May lead to over dependence on imports and exports
- Can cause demotivation which will decrease productivity and increase prices.
Which of the following is the most likely effect of a decrease in motivation due to specialisation?
Demotivation is likely to reduce productivity, which will increase average costs. An increase in the cost of production will shift the SRAS to the left.
