4.1.2
Cards (8)
- Absolute advantageAbsolute advantage occurs when a country can supply using fewer resources than another nation. If a country using the same fcators of production can produce more of a product, then it has an absolute advantage.
- Comparative advantageDavid Ricardo was one of the founding fathers of classical economics. He developed the idea of comparative advantage, which helps to explain why even small countries without an absolute advantage can and do trade.
- Comparative advantage exists when:
- The relative opportunity cost of production for a good or service is lower in one nation than another country
- A country is relatively more productively efficient than another
- The basic rule is to specialise your scarce resources in the goods and services that you are relatively best at
- This opens up gains from specialisation and trade which then leads to a more efficient allocation of resources
- Advantages of specialisation and tradeMost economists argue that trade in goods and services across national borders is an important driver of increased competition and innovation and therefore helpful in sustaining growth and improving living standards. However, it is important to be aware of some of the risks and drawbacks if a country becomes more open to international trade.
- Allocative efficiencyCompetition from lower-cost import sources drives market prices down closer to marginal cost and then reduces the level of monopoly (supernormal) profits
- Productive efficiencySpecialising and selling in larger markets encourages increasing returns to scale (economies of scale) i.e. a lower long run average cost of production
- Dynamic efficiencyEconomies open to trade may see more innovative businesses which invest more in research and development and also in the human capital of their workforce to help raise labour productivity
- X-inefficiencyIntense competition in markets provide a discipline on businesses to keep their unit costs under control to remain price competitive and profitable