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Flashcards in Comparative and Absolute Advantage Deck (8)
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what are the benefits of international trade?

  • 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


absolute advantage

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



comparative advantage

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


comparative advantage theory

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


absolute advantage on PPC


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


comparative advantage on PPC

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


which factors determine comparative advantage?

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


limitations of comparative advantage theory

  • 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