4.1 Theories of Trade Flashcards
What does the Theory of “Absolute Advantage” state?
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.
What is the “Autarky”?
Domestic production and consumption, no specialization and no trade.
What are some benefits from free trade?
- 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
What does the Theory of “Comparative Advantage” state?
A country should produce and specialize in the product in which they have the lowest opportunity cost
What is the difference between Absolute and Comparative advantage?
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
What are some of the sources of comparative advantage?
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