4.1.2 Specialisation and Trade

• Comparative Advantage


  When a country can produce a good or service at a lower opportunity cost than another country
• Absolute Advantage


  When a country can produce a good or service with fewer resources and at a lower cost than another country
• Determinants of Comparative Advantage


  -The quantity and quality of natural resources

  -Demographics eg. age, education, migration, economic activity affect the quantity and quality of labour

  -Rates of capital investment incl. infrastructure

  -Investment in R&D

  -Changes in exchange rates

  -Import controls

  -Non-price competitiveness

  -Banking and legal institutions
• Specialisation


  Factors of production are concentrated on specific goods/services and the surplus is traded with others
• International Trade


  Exchange of products between different countries
• Static Gains


  Gains that happen at the point of trade eg. improvements in allocative and productive efficiency in markets
• Dynamic Gains


  Gains that continue after trade eg. the welfare from improved product quality, increased choice and more innovation
• Assumptions of the Comparative Advantage Model


  -No economies of scale which may amplify the gains of trade

  -Perfect factor substitutability of resources

  -No import controls eg. tariffs and quotas

  -Low transportation costs

  -Ignores externalities of production/ consumption

  -Mutually beneficial terms of trade eg. a fair rate of exchange between goods

  -Homogenous goods eg. goods producer are identical