international trade econ

economies of scale

1. Increasing the market size for a firm from domestic markets to domestic and international markets causes the demand to increase.

2. This causes to the production level and size of production to increase as well, which leads to a fall in average costs and provides economies of scale to the firms.

3. This allows the firms to reduce their prices for consumers too.

absolute advantage

international trade benefits when countries specialize on certain g/s , less natural resource competition so increase in efficiency, ppc, labour and capital are fully employed here

able to produce g/s at lower unit cost

comparative advantage

are able to produce g/s for lower opp cost, determined by abs advantage

calculate abs advantage

eg. bags of wheat max = 40, dvds max = 8 so 40/8=5, so for every dvd → 5 bags of wheat - can use to determine which country has higher abs advantage, not obvious by just looking for trade