International economics 4.1

Absolute advantage

when a country produces more of one good than another country

comparative advantage

when a country can produce more of one good at a lower opportunity cost than another

Advantages of specialisation and trade

1) Higher living standards:

• this is because specialisation leads to higher output, leading to increased real world gdp, therefore increasing living standards

2) May create economies of scale

• allow firms to sell to international markets

3) Lower prices and more consumer choice

Disadvantages of specialisation and trade

1) Based on unrealistic assumptions

2) Overdependence on exports and imports

3) Demotivation, decreasing productivity and increasing prices

Three assumptions of the theory of comparative advantage

• No trade barriers

• no transport costs

• avg cost of production remains constant

Marginal propensity to save calculation

Change in saving/change in income

Three limitations of comparative advantage

1. increased specialisation might result in rising average costs caused by Diseconomies of Scale

2. trade barriers interfere with comparative advantage, reducing the benefits of competitive advantage through tafiffs for instance

3. Transport costs might distort comparative advantage

Diseconomies of scale

Diseconomies of scale occur when an increase in output increases the long run average cost.

Globalisation characterisics

1. Increased international movement of labour

2. Increased international movement of financial capital (money)

3. Increased specialisation

4. Increased international trade

5. Increased trade-to-GDP ratios

FDI (Foreign Direct Investment)

Investment made by a firm in one country to a firm in another country to gain control over the foreign firm

What country has developed a specialisation in producing oil, that now accounts for 50% of their GDP

Saudi Arabia

TransNationl Corporation TNCs

Company that operates in two or more countries

Globalisation meaning

Growing interdependence of countries and integration into a single global market. involving free movement of goods, services, labour, capital, and technology