Specialisation and trade (MAC)

Question 1

What is absolute advantage?

Answer 1

Occurs when a country can produce more of say 2 products than another country with the same quantity of inputs per unit of time

Question 2

What is comparative advantage?

Answer 2

One country has comparative advantafe over another in the production of a good if it can produce it at a lower opportunity cost

Question 3

What is the law of comparative advantage?

Answer 3

Constant returns to scale (PPFs are drawn as straight lines)

No transport costs

No trade barriers

Perfect mobility of FOPs between different uses

Externalities are ignored

Question 4

What are the limitations of the law of comparative advantage?

Answer 4

Free trade us bit necessarily fair trade

It is based on unrealistic assumptions such as constant costs of production zero transport costs and no barriers to trade.

If the opportunity costs were the same, there would be no benefit from specialisation and trade.

Question 5

What are the advantages of specialisation and trade?

Answer 5

Higher living standards and increased employment would result from an increase in world output.

Lower prices, therefore a higher consumer surplus and increased choice

There is a transfer of management expertise and technology

There are economies of scale

There is a reduction in the power of domestic monopolies

Question 6

What are the disadvantages of specialisation and trade?

Answer 6

There is a deficit on the trade in goods and services balance if a countrys goods and services are uncompetitive.

Firms in countries with surpluses might dump them on other countries which could cause local producers to go bankrupt. In the LR, the country could then become dependent on imports.

Increased unemployment in some countries

Increased risk of contagion and disruption resulting from problems in the global economy

Transnational companies may become global monopolies and exploit consumers

There could be unbalanced development