Difference between comparative and absolute advantage- 3 points
- Absolute advantage compares the two countries absolute efficiency to produce a good whereas comparative advantage compares the countries’ opportunity costs of production.
- Specialisation
Absolute advantage suggests that a country should specialize in the production of goods in which it is absolutely more efficient whereas
comparative advantage suggests that a country should specialize in the production of goods in which it has a lower opportunity cost - Mutual Gains
Absolute advantage assumes that countries have little to gain from trade if they do not differ in absolute efficiency however comparative advantage emphasizes that even if one country is less efficient in the absolute production of all goods, there are still potential gains from trade based on differing opportunity costs.
comparative advantage- define and what does it suggest?
Comparative advantage occurs when one country has a lower opportunity cost in the production of a good compared to another country.
The theory suggests that countries should specialize in the production of goods in which they have a comparative advantage in and trade with other countries to achieve mutual gains.
absolute advantage - define and what does it suggest?
(Example if Country A can produce 10 units of a good with the same amount of resources that Country B needs to produce only 5 units of the same good, then Country A has an absolute advantage in the production of that good.)
Absolute advantage occurs when one country can produce a good or service more efficiently (using fewer resources) than another country.
The theory suggests that countries should specialize in producing goods or services they have absolute advantage in and trade with other countries to maximize overall efficiency and output.
Benefits of specialisation- 6 points
- Better quality and quantity of goods (e.g. through global supply chains)
- Increased efficiency
(resource allocation) - Higher productivity
- Technological diffusion
(Specialization and trade facilitate the transfer of technology and knowledge across borders.) - Economies of Scale
- Job Creation and Income Growth
Benefits of trade- 3 points
Global Economic Growth
Access to a Variety of Goods and Services
Diversification of Risks
(Through trade, countries can diversify their sources of income and reduce vulnerability to economic shocks in particular sectors.)
Costs of international trade - 7 points
Transportation Costs
Tariffs and Trade Barriers
Non-Tariff Barriers
Supply Chain Disruptions (e.g. natrual disasters)
Environmental Impact
Dependency on Global Markets
Currency Exchange and Transaction Costs (Fluctuations in currency values can impact the costs of imports and exports.)
Reasons for changes in the pattern of trade between the UK and the world
Nature of protectionist policies
Tariffs
is a tax levied on imported goods and services
Quotas
is a limit to the physical goods imprted to a country
Subsidies
is a payment made by the government to a firm to reduce their costs of production allowing them to offer lower prices.
Causes of countries adopting protectionist policies
- protect domestic jobs
- protect their domestic goods’ demand
- increase government tax revenue
- reduce inflationary pressures
- increasingly become self sufficient
- prevent dumping (anti dumping policies)
Consequences of countries adopting protectionist policies
- risk of retailiation
- increased costs to domestic firms
- lower inflation
Main features of a custom union
- operates as a FTA
- All members follow a common trade barrier set for external non-member countries
Main characteristics of SEM (Single Euorpean Market)
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The role of WTO
their goal is to improve global development and their organisation is the platform for countries to discuss on trade barriers and make agreements.
