4.1 - Singposting

Question 1

Comparative Advantage Evaluation

Answer 1

1. Comparative advantage theory assumes perfect information for both producers and consumers
2. Transport costs are assumed to be zero
3. Countries without the comparative advantage may be able expensive R&D and create patentable products
4. Comparative advantage assumes no economies of scale advantage
5. Comparative advantage ignores the impact of exchange rate changes
6. High inflation over time can erode price competitiveness of goods and services.
7. Protectionist measures such as tariffs and quotas can be used governments in countries without the comparative advantage. This can distort compartive advantage
8. Countries without the comparative advantage may be highly non-price competitive

Question 2

Benefits of Free Trade

Answer 2

1. Increase in world efficiency
2. Large economies of scale benefits
3. Increased competition and lower prices
4. Increased choice for consumers and businesses
5. Higher rates of GDP growth
6. Faster rates of technology transfers