4.1.2 - Specialisation and trade

• Absolute advantage is when a country can produce a good more cheaply in absolute terms than another country
• Comparative advanantange is when a country is able to produce a good more cheaply relative to other goods produced; it has a lower opportunity cost
• Assumptions of Comparative Advantage:

  1. Two countries and two goods
  2. Constant opportunity costs
  3. Fixed resources
  4. Perfect competition
  5. Free trade
  6. Homogeneous goods
• Limitations of Comparative Advantage:

  1. Impractical assumptions
  2. Ignores economies of scale
  3. Ignores non-economic factors
  4. Short-term focus
  5. Distributional effects
• Advantages of Specialization and Trade in an International Context:

  1. Efficiency and Productivity
  2. Consumer Benefits
  3. Resource Allocation
  4. Economies of Scale
  5. International Cooperation
• Disadvantages of Specialization and Trade in an International Context:

  1. Job Displacement
  2. Dependency
  3. Income Inequality
  4. Environmental Concerns
  5. Trade Imbalances
  6. Loss of Domestic Control: