define absolute advanatge
when a country can produce a product using fewer factors of production than another
define comparative advantage
being able to produce goods/services at a lower opportunity cost than other country
from the table which countries have comparative and absolute advatage
Australia has absolute advantage in producing both tobacco and beef.
Australia have comparative advantage in producing beef. Malawi has comparative advantage in producing tobacco
what is the theory of comparative advantage?
a country should specialise in the good/service that they hold comparative advantage in and trade that.
this will increase world output
what are the assumptions/limitations of the theory of comparative advanatage?
- free trade (quotas, tarrifs)
- constant returns to scale (no econonmies of scale), amplifying gains from trade
- factor mobility (assumes that there is perfect geographical and occupational mobility), this is not true tho
- no/low transportation costs (but containerisation and digitalisation does lowkey make it true)
- no externlaities from production/ consumption
show the gains of trade and specialisation in a supply and demand diagram
how might increased costs (from tarrifs and transportation) affect the gains from trade?
they increase the price of the imports, reducing demand for imports overseas. This means they they will start producing the goods domestically rather than import, reducing volume of trade, reducing gains from trade
what are the gains from trade and specialisation?
gains in trade (diagram + analysis + eval)
consumer and producer welfare
We assume that the good can be purchased at a lower world price because other countries may have lower production costs due to their comparative advantage. domestic production contracts from Qe to Q1 and domestoc demand extends from Qe to Q2 as it is now more affordable to consumer. One reuslt of this is that quanitity of imported goods becomes Q1-Q2
However, this assumes that domestic supply costs remain unchanged – often a dynamic effect of trade is to drive cost-reducing innovations.
what are general gains in trade?
developing countries
- increased employment in export indsutries, rising per capita incomes and better HDI
- revenue from exports can be used to finance essential imports such as capital equipment/ technology
- injection of demand into circular flow, positive multipler ….
- a source of foreign currency to help overcome a savings gap
- falling prices for consumers
what are disadvtantages of trade?
developing countries
- volatile global prices affect terms of trade, export revenues, profits and tax revenues for governments
- risks that exports will be affected by geo-politaical uncertainties and cylical shifts- leadinsg to increased exposure to external shocks such as financial crisis/china US trade war
- structural unmeployment
- countries that specialise in only a few natural resources may suffer from the natural resource curse, making them poorer that other countries less sependant on exporting primary commodities
- rise in income and wealth inequality
what is the “natural resource curse”?
The natural resource trap is a phenomenon in which countries that rely heavily on natural resource exports struggle to diversify their economies and can become trapped in poverty.
what are some evaluation points to gains of trade?
- impacts of trade on wages and employment tend to be geographically concentrated, increasing inequality
- emerging countries need to diversify export sectors and move to higher value added industries (manufacturing) to gain more from global trade
