Why do Countries Trade?

Question 1

Benefits of trade

Answer 1

Lower prices, increased choice, resource differences, economies of scale, increased competition, efficient resource allocation and source of foreign currency exchange

Question 2

Absolute advantage

Answer 2

When a country is able to produce more of a good than another country given the same resources ie they are more efficient

Question 3

Comparative advantage

Answer 3

When a country can produce goods at a lower opportunity cost than another country

Question 4

Why could a country have a comparative advantage?

Answer 4

More land or more labour

Question 5

Limits of the theory behind comparative advantage

Answer 5

Model assumes only two countries exist, the goods are identical, there is free trade, no transport costs and everyone has perfect knowledge.