Specialisation & Trade Overview

Question 1

What is Absolute Advantage

Answer 1

Absolute advantage is when a producer can provide a good or service in greater quantity for the same cost, or the same quantity at a lower cost, than its competitors.

Question 2

What is Comparative Advantage?

Answer 2

agents have a comparative advantage over others in producing a particular good if they can produce that good at a lower relative opportunity cost or autarky price

Question 3

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

Answer 3

A production possibility frontier shows the maximum potential output of the economy, using all resources efficiently.

Question 4

If one country has a comparative advantage in the production of one good…

Answer 4

The other country will always have a comparative advantage in the production of the other good.

Question 5

If countries specialise in the good for which they have a comparative advantage in total world output…

Answer 5

Increases

Question 6

What does the theory of comparative advantage state?

Answer 6

The theory of comparative advantage states that global output will increase if countries produce the goods in which they have a comparative advantage.

Question 7

What are the the three unrealistic assumptions of the theory of Comparative Advantage?

Answer 7

1. Average cost of production is constant
2. No trade barriers
3. No transport costs

Question 8

What are the three different types of diseconomies of scale? (ABC Acronym)

Answer 8

A: Alienation
B: Bureaucracy
C: Communication or Poor communication

Question 9

Why is assumption 1 (Average cost production is constant) not always true in real life?

Answer 9

Increased specialisation might result in rising average costs caused by diseconomies of scale

Question 10

What is a trade barrier?

Answer 10

A trade barrier is a restriction placed by a government on the import of foreign goods. For example, a tariff.

Question 11

What is a tariff?

Answer 11

A tariff is a tax imposed by a government on goods and services imported from other countries that serves to increase the price and make imports less desirable.

Question 12

Why are trade barriers a limitation to the theory of Comparative Advantage?

Answer 12

Trade barriers might distort comparative advantage (may reduce the benefit of comparative advantage)

Question 13

Why are transport costs a limitation of the theory of Comparative Advantage?

Answer 13

Real life transport costs might distort comparative advantage

Question 14

What is an advantage of specialisation & trade (World Output)?

Answer 14

Specialisation and trade may lead to higher world output and therefore higher living standards and also increasing total world GDP

Question 15

What is a disadvantage of specialisation & trade (World Output)?

Answer 15

Specilisation & Trade is based on unrealistic assumptions, No transport costs, No trade barriers and constant average costs of production

These lead to the limitations of Specilisation & Trade

Higher prices lead to less demand - which leads to less production which leads to a decrease in total world output which leads to a decrease in total world GDP

Question 16

What is an advantage of specialisation & trade (International Markets)?

Answer 16

Specialisation & trade may create larger markets for firms enabling them to benefit from economies of scale.

Increased quantity produced –> a decrease in Long run average costs –> more profits which then can be reinvested into the economy

An example of this Saudi Arabia which only discovered oil in 1938 however since then their economy has seen huge growth

This is because they specialised and traded in oil

In the early 1970s Saudi Arabia’s real GDP was growing by over 20% a year

Question 17

What is the definition for economies of scale?

Answer 17

A decrease in long run average costs as output increases

Question 18

What is a disadvantage of specialisation & trade (International Markets)?

Answer 18

Specialisation and trade may lead to overdependence on imports

For example, in 2009 bitter disputes erupted between Ukraine and Russia. And Russia cut off their gas supply to large parts of Europe in response

This was especially bad for Bulgaria who overdepend on gas supplies that come from Russia and through Ukraine. Bulgaria get almost all their gas supplies from Russia.

This forced Bulgaria to stop producing in some of their really important factories which forced their economic growth to slow down.

Question 19

What is a disadvantage of specialisation & trade (International Markets)? PT2

Answer 19

Specialisation and trade may lead to overdependence on exports

For example oil accounts for 50% of Saudi Arabia’s real GDP which means that their economy is not diversified. If an economy is not diversified it is more vulnerable.

Question 20

What is an advantage of specialisation & trade (Price Level)?

Answer 20

Specialisation & Trade can lead to lower prices and more choice for consumers

Question 21

What is a disadvantage of specialisation & trade (Price Level)

Answer 21

Specialisation & Trade may lead to demotivation which decreases productivity and therefore pushes prices up

Even though specialisation & trade should theoretically lead to a decrease in price level it can actually cause workers to become more alienated, the production process can become more bureaucratic and communication can become worse

This all leads to price level increasing