a) Advantage

a) absolute and comparative advantage (numerical and diagrammatic): assumptions and limitations relating to the theory of comparative advantage

comparative advantage = when a country can specialise at a lower opportunity cost than other nations

• export the excess goods/services

• import goods/services not produced

absolute advantage = when a country can produce a good/service using less production factors than other nations

assumptions of competitive advantage

• zero transport costs

  • firms always have the money to trade

• perfect information

  • nations know each others and their own comparative advantage(s)

• factor mobility

  • firms always have the resources to specialise

• constant production costs

  • firms always have the money to specialise

limitations of having a comparative advantage

• foreign dependence

• structural unemployment

• negative externalities of production