4.1.2 specialisation and trade Flashcards
what is an absolute advantage
Absolute advantage exists when a country can produce a good more cheaply in absolute terms than another country
what is a comparative advantage and what does the theory state
Comparative advantage exists when a country is able to produce goods at a lower opportunity cost
the theory states that if different countries have different comparative advantages and they trade, there will be a greater global output meaning there will be more economic welfare
what are the assumptions and limitations of the model
● Comparative advantage assumes there are no transport costs, and these could
lower or prevent any comparative advantage.
● It also assumes costs are constants and that there are no economies of scales. Economies of scale help to increase the gains from specialisation.
● In the model, goods are assumed to be homogenous, which is unlikely to hold in real life. The fact products aren’t homogenous makes it difficult to conclude that a country has a comparative advantage as their products can’t be perfectly compared.
● It also assumes that factors of production are perfectly mobile, there are no tariffs or other trade barriers and there is perfect knowledge.
● Whether trade takes place will depend on the terms of trade between the countries.
assumestheres perfect factor subsitutability
what are the advantages of specialisation and trade
● Comparative advantage shows how world output can be increased if countries specialise in what they are best at producing, this will increase global economic growth.
● Trading and specialising allows countries to benefit from economies of scale, which reduces costs and therefore decrease prices globally.
● Different countries have different factors of production and so trade allows countries to make use of factors of production, or the things produced by these factors, which they otherwise may have been unable to.
● Trade enables consumers to have greater choice about the types of goods they buy, and so there is greater consumer welfare.
● Trade also means there is greater competition, which provides an incentive to innovate. This creates new goods and services and new production methods, increasing consumer welfare and lowering costs respectively.
● Countries which isolate themselves for political reasons, like North Korea, have found that their economies tend to stagnate.
what are the disadvantages of specialisation and trade
● However, trade can lead to over-dependence, where some countries become dependent on particular exports whilst others become dependent on particular imports. This can cause problems if there are large price falls in the exports of if imports are cut for political reasons.
● It can cause structural unemployment, as jobs are lost to foreign firms who are more efficient and competitive. The less mobile the workforce, the higher the chance that changes in demand due to trade will reduce output and employment over long periods of time. This is a big problem in the UK as some areas such as Manchester suffer from unemployment as their traditional industries declined, for example ship-building.
● The environment will suffer due to the problems of transport as well as the increased demand for resources e.g. deforestation.
● Countries may suffer from a loss of sovereignty due to signing international treaties and joining trading blocs, for example in the EU.
● They may see a loss of culture as trade brings foreign ideas and products to the country.
