Week 3 - Specialisation and trade Flashcards
Who developed the idea of comparative advantage?
David Ricardo
When does comparative advantage exist?
When 1. the relative opportunity cost of production for a good or service is lower in one nation than in another country. 2. A country is relatively more productively efficient than another.
Give 3 assumptions behind the theory of comparative advantage
- Factor mobility between industries - geographical and occupational mobility - workers are assumed to be equally production in whatever job they do. 2. No trade barriers, such as tariffs or quotas. 3. Low transportation costs to get products to market.
Comparative advantage is a dynamic concept. What does this mean?
It changes over time.
Give 3 factors that affect comparative advantage
- The quantity and quality of natural resources available. 2. Demographics - such as ageing population, net migration, level of women’s participation in the labour force. 3. Rates of capital investment including infrastructure spending.
What is gravity theory?
Businesses usually trade more in markets in close geographical proximity
When does absolute advantage occur?
When a country can supply a product using fewer resources than another.
Give two gains from specialisation and trade
- Free trade allows for deeper specialisation and benefits from economies of scale. 2. Free trade increases market competition and choice which drives up product quality for consumers.
Give two drawbacks of specialisation
- Volatile global prices affecting export revenues and profits for producers and tax revenues for government. 2. Risks those exports will be affected by geopolitical uncertainties and cyclical fluctuations in demand.
What is the resource curse?
Countries that specialise in only a few primary commodities may suffer from the natural resource trap which may make them relatively poorer in the long term than countries who are less dependant on exporting primary commodities.
