Specialisation & Trade Overview Flashcards
What is Absolute Advantage
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.
What is Comparative Advantage?
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
What does PPF stand for and what does a PPF show?
A production possibility frontier shows the maximum potential output of the economy, using all resources efficiently.
If one country has a comparative advantage in the production of one good…
The other country will always have a comparative advantage in the production of the other good.
If countries specialise in the good for which they have a comparative advantage in total world output…
Increases
What does the theory of comparative advantage state?
The theory of comparative advantage states that global output will increase if countries produce the goods in which they have a comparative advantage.
What are the the three unrealistic assumptions of the theory of Comparative Advantage?
- Average cost of production is constant
- No trade barriers
- No transport costs
What are the three different types of diseconomies of scale? (ABC Acronym)
A: Alienation
B: Bureaucracy
C: Communication or Poor communication
Why is assumption 1 (Average cost production is constant) not always true in real life?
Increased specialisation might result in rising average costs caused by diseconomies of scale
What is a trade barrier?
A trade barrier is a restriction placed by a government on the import of foreign goods. For example, a tariff.
What is a tariff?
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.
Why are trade barriers a limitation to the theory of Comparative Advantage?
Trade barriers might distort comparative advantage (may reduce the benefit of comparative advantage)
Why are transport costs a limitation of the theory of Comparative Advantage?
Real life transport costs might distort comparative advantage
What is an advantage of specialisation & trade (World Output)?
Specialisation and trade may lead to higher world output and therefore higher living standards and also increasing total world GDP
What is a disadvantage of specialisation & trade (World Output)?
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
What is an advantage of specialisation & trade (International Markets)?
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
What is the definition for economies of scale?
A decrease in long run average costs as output increases
What is a disadvantage of specialisation & trade (International Markets)?
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.
What is a disadvantage of specialisation & trade (International Markets)? PT2
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.
What is an advantage of specialisation & trade (Price Level)?
Specialisation & Trade can lead to lower prices and more choice for consumers
What is a disadvantage of specialisation & trade (Price Level)
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
