Th4.1: Assumptions and Limitations of this Theory

Question 1

What does comparative advantage assume?

Answer 1

there are no transport costs, and these could lower or prevent any comparative advantage

Question 2

What does it also assume about costs and economies?

Answer 2

costs are constant and that there are no economies of scale. economies of scale help to increase the gains from specialisation

Question 3

In the model, goods are assumed to be?

Answer 3

homogenous, which is unlikely in real life

Question 4

The fact goods aren’t homogenous makes it difficult to…

Answer 4

conclude that a country has a comparative advantage as their products can’t be perfectly compared

Question 5

What does it assume about factors of production?

Answer 5

assumes factors of production are perfectly mobile, there are no tariffs or other trade barriers and there is perfect knowledge

Question 6

Whether trade takes place will depend on…

Answer 6

terms of trade between the countries