absolute and comparative advantage

absolute advantage

when a country can produce more goods or services compared to another country using the same resources

comparative advantage

a country should specialise in producing goods and services where they have a lower opportunity cost compared to another country and then trade

factors affecting comparative advantage

1. costs of production

2. productivity of factors of production

3. investment in research and development

4. non-price competitiveness of producers

5. impact of import controls ( tariffs and non tariffs barriers)

costs of production

lower costs of labour give China advantage in producing consumer goods

productivity of factors of production

Germany’s ‘mittlsland’ of small-medium manufacturing businesses

investment in research and development

research into pharmaceuticals in USA through science/ private firms

non-price competitiveness of producers

e.g. Belgium and chocolate

impact of import controls

EU using protectionism to protect agriculture, Trump and tariffs to protect US agriculture

why might specialisation not always increase welfare

1. structural unemployment

2. goods are difficult to move

3. negative externalities

4. natural resources are limited