4.1

• What is the theory of comparative advantage

  Countries find specialisation mutually advantageous if the opportunity cost of production are different. If they are the same there will be no gains from trade
• What is absolute advantage

  This is when a country is able to produce a good more cheaply relative to other goods produced
• Evaluate the limitations of comparative advantage theory

  No transport costs

  Assumes costs are constant and there are no economies of scale

  Goods are assumes to be homogenous

  Assumes factors of production are perfectly mobile

  Trade depends on terms of trade between countries
• What are some advantages of specialisation and trade

  Comparative advantage shows how world output can be increased if countries specialise in what they are best at producing

  Allows countries to benefit from economies of scale

  Different countries have different FoP so trade allows to make use for these

  Trade enables consumers to have greater choice increasing consumer welfare

  Trade means there is greater competition providing an incentive to innovate - countries that isolate themselves tend to have a stagnating economy
• What are some disadvantages of specialisation and trade

  Can lead to overdependence creating problems if exports fall

  Causes structural unemployment as jobs are lost to foreign firms who are more efficient and competitive

  Environment suffers due to transport

  Countries suffer loss of sovereignty due to signing international treaties and joining trade blocs

  May be a loss of culture as trade brings in foreign ideas
• What are factors that influence the pattern of trade

  Comparative advantage

  Emerging economies

  Trading blocs and bilateral agreements

  Relative exchange rates