4.1.2 Specialisation and trade

Absolute Advantage

Occurs when a country can produce a product using fewer resources than another nation.

Absolute Advantage Condition

Producing more of a product using the same quantity of factors of production.

Drivers of Absolute Advantage

Higher human capital, fertile land, and access to technology and innovation.

Comparative Advantage

Specialising in a product based on having a lower relative opportunity cost.

Opportunity Cost

What you have to give up to make one more of a good.

Ricardian Evaluation: Worker Skills

Assumes that workers are equally skilled in both industries.

Ricardian Evaluation: Transport Costs

Fails to account for the cost of transporting goods between countries.

Ricardian Evaluation: Factor Mobility

Assumes all factors of production are fully mobile.

Ricardian Evaluation: Social Costs

Ignores real societal costs like worker exploitation.

Ricardian Evaluation: Exchange Rates

Neglects the impact of fluctuating exchange rates on trade.