Specialisation And Trade

Question 1

What is absolute advantage?

Answer 1

When one country can produce a good with fewer resources than another

Question 2

What is comparative advantage?

Answer 2

A country has a comparative advantage if it can produce a good at a lower opportunity cost

Question 3

The law of comparative advantage

Answer 3

This states that trade can benefit all countries if they specialise in goods in which they have a comparative advantage

Question 4

If India has a lower opportunity cost than the Uk who has the comparative advantages

Answer 4

India

Question 5

Limitations to the theory of comparative advantage? (4)

Answer 5

1. Assumes no transport cost- can prohibit the benefits of trade
2. Increased specialisation may lead to diseconomies of scale
3. Government may restrict trade through tariffs
4. Comparative advantage measures static advantage but not dynamic advantage. In the future India may switch the product it specialises in.