Law of comparative advantage 4.1

Question 1

Absolute advantage

Answer 1

occurs when a country can produce a product using fewer factors of production than another nation

Question 2

Comparative advantage

Answer 2

states that a country should specialise in the goods or services it can produce at the lowest opportunity cost, and then trade with another country

Question 3

comp, adv def

Answer 3

How much of good A is sacrificed to make each unit of Good B

Question 4

how to see which country has the comparative advantage

Answer 4

On PPF, go to the axis with the biggest gap between prods, country producing more on that axis have the comparative advantage, and the other country have it for the other axis

Question 5

Consuming beyond the PPF:

Answer 5

Jack = 10 forks, 30 knives 
Jill = 30 forks, 10 knives 

• Jack 1 fork= 3 knives
• Jack 1 knife = 1/3 forks – C adv
• Jill 1 fork = 1/3 knives – C adv
• Jill 1 knife = 3 forks

Question 6

Specialising + sacrificing extra units can lead to

Answer 6

being able to consume beyond the ppf
Eg, jack could create 30 knives, and sell 15 to jill, jill could make 30 forks and sell 15 to jack.
Both get 15 each, which was previously unattainable.

Question 7

criticisms of comparative advantage part 1

Answer 7

• Perfect knowledge – consumers may not not always know where the cheapest goods are
• No transport costs – added transport costs for other nations to buy products = may erode CA
• No economies of scale – economies of scale can reduce costs
• Rates of inflation ignored

Question 8

criticisms of comparative advantage part 2

Answer 8

• No import controls
• Non price competitiveness ignored
• exchange rate movements ignored
• R/D investment ignored

Question 9

Assumptions of ÇA

Answer 9

• no transportation costs
• perfect knowledge
• no external costs in production
• no barriers to trade
• no EOS and costs are constant