4.2 absolute and comparative advantage theories; parallel PPC curve

absolute advantage

country’s ability to produce a good using fewer resources than another country

theory of absolute advantage

• focus on who can produce more given the same resources

• the products can make all countries better off, when a country specialises in the one it has an absolute advantage in and trade it

comparative advantage

the ability of an economy to produce a given product at a lower opportunity cost than its trading partners

comparative advantage theory

• focus on calculation what is better to be given to us to produce something else

• nations will export the good they have a comparative advantage in (can produce more efficiently) and import those that it cannot produce efficiently

parallel PPC curve case

• parallel curves = identical opportunity cost = no comparative advantage in 1 or other good

limitations of theory of comparative advantage

• depends on many assumptions

• graphs only 2 countries

• trade on basis of comparative advantage may lead to excessive specialisation

assumptions of comparative advantage theory

• FOPs are fixed

• technology is fixed

• perfect mobility of FOPs within the country

• full employment of resources

• free trade

• homogenous products

• ignored transportation costs