4.1.2 Specialisaiton And Trade

Question 1

What is absolute advantage?

Answer 1

Absolute advantage is when one country can produce more of a good or service with the same amount of resources than another country

Question 2

What is comparative advantage?

Answer 2

Comparative advantage is when a country can produce a good with a lower opportunity cost than another country

Question 3

Who developed absolute advantage and comparative advantage?

Answer 3

Absolute advantage was developed by Adam Smith
Comparative advantage was developed by David Ricardo

Question 4

What does the steepness of the PPF slope suggest?

Answer 4

There is higher opportunity cost for steeper slopes
These countries are specialised according to comparative advantage

Question 5

How do countries consume beyond their own PPF?

Answer 5

Consumption beyond an individual PPF would be unattainable without trade

Question 6

What needs to be the case for trade to benefit both parties?

Answer 6

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Question 7

What are the assumptions required for comparative advantage theory?

Answer 7

Resources easily switch between industries (perfect factor mobility)
No transportation costs
No trade barriers
Perfect competition in all markets
Full employment of resources
Only two countries with only two goods

Question 8

What are the limitations of comparative advantage theory?

Answer 8

Transport costs could reduce benefits of trade
Workers cannot easily switch between industries (structural unemployment)
Dynamic comparative advantage (comparative advantage changes over time)
Trade barriers distort trade patterns
Externalities are not accounted for
Unequal benefits of trade

Question 9

What are the advantages of specialisation and trade?

Answer 9

Global production rises due to efficient resource allocation
Consumption can lie beyond production possibilities, greater choice
Economies of scale
Enhanced competition
Knowledge transfer and technological diffusion
Foreign investment boosts growth

Question 10

What are the disadvantages of specialisation and trade?

Answer 10

Structural unemployment in specialised industries
Over-reliance on specialised industries
Dependency on trade
Environmental damage of trade
Loss of traditional industries and skill
Unequal benefits
Regulatory competition in labour and environmental standards