4.1 Theories of Trade Flashcards

1
Q

What does the Theory of “Absolute Advantage” state?

A

This theory states that a country should specialize in producing the goods and services in which they are the more efficient than other countries/producers. This should increase their production of specialized goods and services. Which they should trade with other countries/ producers. This allows them to consume beyond their PPC.

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2
Q

What is the “Autarky”?

A

Domestic production and consumption, no specialization and no trade.

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3
Q

What are some benefits from free trade?

A
  • increased competition
  • lower prices
  • greater choice
  • acquisition of resources
  • more foreign exchange earnings
  • access to larger markets
  • economies of scale
  • more efficient resource allocation
  • more efficient production
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4
Q

What does the Theory of “Comparative Advantage” state?

A

A country should produce and specialize in the product in which they have the lowest opportunity cost

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5
Q

What is the difference between Absolute and Comparative advantage?

A

Absolute:
A country which produces MORE of a good or service using ALL its resources compared to another country - should specialize in producing that g/s

Whereas, Comparative:
A country which has a lower OPPORTUNITY COST in producing a good or a service should specialize in production of that g/s

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6
Q

What are some of the sources of comparative advantage?

A

1) Land
–> natural resources
2) Labour
–> skills and wage costs of labour force
–> quality of labour force
3) Capital
–> availability and quality of the machinery
4) Enterprise
–> research and development
++++ Other factors +++++
–> eg. exchange rate
–> corruption

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