Specialisation and Trade

Question 1

Define absolute advantage

Answer 1

When a country can produce a good or service more efficiently than another country, using the same amount of resources.

Question 2

Define comparative advantage

Answer 2

When a country can produce a good/service at a lower opportunity cost than another country.

Question 3

Define the theory of comparative advantage

Answer 3

States that global output will increase if countries specialise in their comparative advantage.

Question 4

Assumptions of comparative advantage

Answer 4

1. Assumes no transportation, protectionism cost;
2. factors perfectly mobile;
3. cost of production stays constant, no economies of scale.

Question 5

Limitations of comparative advantage

Answer 5

Limitations
1. Trade barriers exist, tariffs exist and transportation cost, flight cost, rail cost exists

2. Some FOP cannot change (eg land) labour too specialised cannot be changed
3. Increased specialisation might lead to higher average cost due to diseconomies of scale

Question 6

Limitation of the comparative advantage theory

Answer 6

1. Diseconomies of scale may occur
2. Real life transport cost may distort cost
3. Trade barriers exist

Question 7

Disadvantages of specialisation and trade

Country, consumers, producers

Answer 7

1. theory of specialisation and trade is based on comparative advantage -> unrealistic assumptions
   - trade barriers, transportation cost exist
2. overdependence on imports and exports (Bulgaria slow growth from russia war)

Question 8

Advantages of specialisation and trade

Country, consumers, producers

Answer 8

1. Higher standard of living
2. rise in GDP from economies of scale
   (more output to sell at international market -> trade surplus, AD - GDP)
3. Lower price and more choices for consumers