Comparative and Absolute Advantage

Question 1

what are the benefits of international trade?

Answer 1

• lower prices: as global division of labour takes place, multiplied efficiencies add to overall wealth of consumers everywhere
• taking advantage of different factor endowments
• economies of scale
• increased choice and variety
• acquisition of needed resources: trade can be the only way for countries to obtain critical goods to increase standard of living
• competition to improve efficiency: domestic markets put under greater pressure to improving services and lowering prices
• political benefits: trade and integration encourage compromise and resolution between nations

Question 2

absolute advantage

Answer 2

situation that occurs in comparative advantage theory when one country can produce more of a given product with the same or fewer resources than another country

Question 3

comparative advantage

Answer 3

when a country produces a good at a lower domestic opportunity cost than other country

Question 4

comparative advantage theory

Answer 4

countries should specialise in the production of whatever has the lowest opportunity cost

Question 5

absolute advantage on PPC

Answer 5

• country U has AA in wheat
• country S has AA in oil

Question 6

comparative advantage on PPC

Answer 6

• country J has CA in smartphones
• country C has CA in TVs
• country J has AA in both

Question 7

which factors determine comparative advantage?

Answer 7

• relative abundance of the resource
• value of the good produces from the resource to the world market

Question 8

limitations of comparative advantage theory

Answer 8

• perils of extreme specialisation: complete specialisation very risky to nation and limits potential for full development
• unrealistic assumptions: transport costs irrelevant, goods assumed to be identical, perfect information available, relatively constant costs, two-countries only, full employment assumed