Specialism & Trade Flashcards
Absolute Advantage Definition
When a country is more efficient in producing a product than other country
Comparative Advantage Definition
When a country can produce a product at a lower opportunity cost than other country = relative advantage in producing that product
How does trading and absolute advantage work?
When one country is more efficient than another at producing a commodity, but is less efficient at producing a second commodity than other country, both nations can gain by each specialising in the production of the commodity they have an Absolute Advantage in
The Law of Comparative Advantage
Even if one country has absolute advantage in producing both goods, they can still benefit from specialisation and trade if it specialises in the range of production in which it has comparative advantage. Therefore, the trade between the two countries will be mutually beneficial.
Assumption relating to the theory of comparative advantage
- no transports costs
- no trade barriers
- average cost of production is constant
- perfect mobility of resources between different uses
- buyers / consumers have perfect knowledge
Problems relating to the theory of comparative advantage
- transports costs > benefits of comparative advantage
- trade barriers might distort comparative advantage
- Increased specialisation & production = diseconomies of scale = rising of average costs
Advantages of specialisation and trade
- efficient resource allocation
- higher world output = higher living standards
- lower prices & more choice for consumers
- incentive for domestic producers to be more efficient
- larger markets for firms = benefit from economies of scale
Disadvantages of specialisation and trade
- based unrealistic assumptions
- for LDCs, specialisation in the production of primary products = prevent diversification into more productive manufacturing industries
- danger of overdependence on imports
- a country’s goods & services may be uncompetitive = trade deficit
