Specialisation And Trade Flashcards
What is specialisation
When one country or region specialises in the production a very limited range of goods and services
What is absolute advantage
When an economy can produce more of a product with the same level of FOPs
What is comparative advantage
When an economy has an absolute advantage in the production of both goods, produces
the good that it has a lower opportunity cost than that of its trading rivals
When does comparative advantage occur(2)
When a country can produce a good or service at a lower opportunity cost than another country
They have to give up producing less of another good than another country using the same resources
What doesn’t comparative advantages consider (2+)
Doesn’t consider the exchange rate when considering the cost of production for both countries = if price of one good increase, it is more worthwhile producing that good, even if the country has a comparative advantage in the other good
Limitations of Comparative advantage theory (3)
Specialising fully = structural unemployment = workers might not gain the transferable skills they need to change between sectors
Countries can develop an advantage in the production of a good
Example = Vietnam is the largest coffee supplier to the UK = over the last 30 years become one of the world’s largest coffee producers.
Further limitations of CA theory (2)
Countries do not produce just two goods = they price a variety
Simple model of just two countries
Advantages of specialisation (4)
Greater world output = economic welfare.
Higher quality + greater variety
Lower average costs = market more competitive
Opportunities for economies of scale
Disadvantages of specialisation (3)
Countries could become over-dependent on the export of one commodity = wheat = if there are poor weather conditions
Structural unemployment = production moves abroad
Some countries might become stuck in the production of one good or service = can’t develop further
