4.1.2 Specialisation and trade

What is Absolute Advantage?

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

What is Comparative Advantage?

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

What does the theory of comparative advantage state?

The theory of comparative advantage states that= countries should specialise in producing goods for which they have a comparative advantage, leading to more efficient allocation of resources and increased overall global output.

What are the assumptions and limitations of the theory of comparative advantage?

Assumptions of the theory of comparative advantage=

• Zero transport costs: does not account for the costs of moving goods between countries, which could lower or prevent any comp. adv.

• Perfect knowledge: assumes all agents have full information about prices, technology, and resources

• Factors of production are mobile within countries: assumes that resources can move freely between industries within a country

• Constant returns to scale: assumes that doubling inputs will double outputs, no EoS (which help increase specialisation gains)

• No trade barriers: assumes there are no tariffs, quotas, or other restrictions on trade

What are the advantages of specialisation and trade?

Advantages of specialisation and trade=

• Increased efficiency= countries can produce goods at a lower opportunity cost, leading to more efficient allocation of resources.

• Higher output= specialisation allows for increased production and global output, benefiting all countries involved in trade.

• Lower prices= increased competition from international trade can lead to lower prices for consumers.

• Greater variety of goods= trade allows countries to access a wider range of products that they may not be able to produce domestically.

• Economic growth= trade can stimulate economic growth by providing access to larger markets and encouraging innovation and investment.

What are the disadvantages of specialisation and trade?

Disadvantages of specialisation and trade=

• Dependency on other countries= countries may become reliant on imports for essential goods, making them vulnerable to supply chain disruptions.

• Job losses in certain industries= domestic industries may struggle to compete with foreign producers, leading to unemployment in those sectors.

• Income inequality= trade can exacerbate/ worsen income disparities between skilled and unskilled workers, as well as between countries.

• Environmental concerns= increased production and transportation associated with trade can lead to higher carbon emissions and environmental degradation.

• Exploitation of workers= some countries may have lower labour standards, leading to poor working conditions and exploitation of workers in certain industries.