Theme 4: Specialisation and Trade

Question 1

What is meant by the theory of comparative advantage?

Answer 1

If countries specialise in the production of the goods in which they have a comparative advantage, global output will increase.

Question 2

What is meant by: Assumptions of the Theory of Comparative Advantage?

Answer 2

The assumptions of the theory of comparative advantage are that

1. average costs remain constant
2. there are no trade barriers
3. no transport costs.

Question 3

Limitations of the Theory of Comparative Advantage?

Answer 3

The limitations of the theory of comparative advantage are that

1. diseconomies of scale increase average costs
2. there are trade barriers such as tariffs
3. there are transport costs when trading

Question 4

Advantages of Specialisation and Trade?

Answer 4

1. Leads to an increase in global output and living standards
2. May create economies of scale
3. Can lead to lower prices and more choice for consumers

Question 5

Disadvantages of Specialisation and Trade?

Answer 5

1. Benefits are based on unrealistic assumptions
2. May lead to over dependence on imports and exports
3. Can cause demotivation which will decrease productivity and increase prices.