4.1.2 Specialisation And Trade

Question 1

what is absolute advantage?

Answer 1

• occurs when a country can produce a product using fewer resources than another nation

Question 2

what is comparative advantage?

Answer 2

• relative opportunity costs of production for a good or service is lower than in another country

Question 3

what are factors affecting comparative advantage?

Answer 3

• quantity and quality of natural resources available
• demographics
• rates of capital investment
• investment in research which can drive business innovation
• fluctuations in the exchange rate which then affect prices of both exports and imports
• import controls such as import tariffs
• non - price competitiveness of producers

Question 4

what are assumptions of comparative advantage model?

Answer 4

• no trade barriers
• low transportation costs to get products to market
• no externalities from production or consumption

Question 5

What are the advantages of specialisation and trade?

Answer 5

• lower price and more choice
• larger markets and EOS for firms
• high economic growth rates and living standards

Question 6

What are the disadvantages of specialisation and trade

Answer 6

• exposure to external shocks = due to the interdependence
• deficit on the current account = some countries will M < X
• unemployment = structural unemployment
• dumping = due to perhaps to excess production
• over specialisation