Specialisation and Trade

• Comparative vs Absolute advantage

  Comparative: A country should specialise in the goods that it can produce at the lowest opportunity cost

  Absolute: Ability to produce a good using fewer factors of production than another country
• What are the assumptions of Comparative Advantage?

  • No transport costs
  • There is perfect knowledge
  • Constant costs of production as economies of scale are not considered
• What diagram can be used to illustrate Comparative and Absolute advantages?

  Production Possibility Frontier
• What are the limitations of the Comparative Advantage theory?

  • Over-dependence on other countries which creates vulnerability
  • Environmental damage due to negative externalities of production
  • Uneven distribution of income
  • Structural unemployment
• Advantages of specialisation and trade

  • Lower prices
  • More variety of goods
  • More competition which leads to better-quality products
  • Economic growth
  • Improved living standards
• Disadvantages of specialisation and trade

  • Emergence of global monopolies: Which dictate prices and output, while influencing governments
  • Exposure to external shocks due to interdependence
  • Deficit on Current Account of BoP
  • Loss of sovereignty and culture: as a result of cultures blending and influencing dominant trading partners
  • Developing economies might overspecialise: Lack of finance to develop a diversified product base