1c. Specialisation and trade

What is meant by: Comparative advantage?

A country has a comparative advantage in the production of a good if they can produce it at a lower opportunity cost than another country

What is meant by: Theory of Comparative Advantage?

If countries specialise in the production of the goods in which they have a comparative advantage, global output will increase.

What is meant by: Assumptions of the Theory of Comparative Advantage?

The assumptions of the theory of comparative advantage are that average costs remain constant; there are no trade barriers and no transport costs.

What is meant by: Limitations of the Theory of Comparative Advantage?

The limitations of the theory of comparative advantage are that diseconomies of scale increase average costs; there are trade barriers such as tariffs and there are transport costs when trading.

What is meant by: Advantages of Specialisation and Trade?

• Leads to an increase in global output and living standards

• May create economies of scale

• Can lead to lower prices and more choice for consumers

What is meant by: Disadvantages of Specialisation and Trade?

Benefits are based on unrealistic assumptions

May lead to over dependence on imports and exports

Can cause demotivation which will decrease productivity and increase prices.