Theme 4 KAA and Evaluation

Comparative Advantage

KAA

• d

Evaluation

• Assumes perfect factor mobility - when a country specialises labour and capital can freely switch between industries

• When China entered the global market for manufacturing, the theory suggests American workers would move to industries where America has a comparative advantage

• However, factory workers in Detroit cannot immediately become software engineers overnight, meaning they were stuck with few jobs and little ability to pivot into something else

• Free trade increases total output on paper but the losers never see those gains

• Short run costs of specialisation might outweigh the long run gains, which is why governments still impose protectionist policies even when the theory says they shouldn’t

a

a

a