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Comparative Advantage

Revision lesson
by

Hugo Flower

on 15 September 2016

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Transcript of Comparative Advantage

Specialisation and
Comparative Advantage

Final example:
Countries will usually specialise in and then export products, which use intensively the
factor inputs, which they are most abundantly endowed.
Why trade?
The UK’s comparative advantage now lies in the following areas: oil, chemicals &
pharmaceuticals, aerospace and medical technology, insurance, financial services, computer services &
software, other business services, and entertainment.
The UK:
Another example:
This is even true if a country has Absolute Advantage.
We have lost much if not all of our comparative
advantage in textiles, steel, coal and many other areas of traditional manufacturing industry where we run structural trade deficits.
If each country specialises in those goods and services where they have an advantage, then total output can be increased leading to an improvement in allocative efficiency and economic welfare.
Comparative advantage occurs when one country can produce a good or service at a lower opportunity cost than another. This means a country can produce a good relatively cheaper than other countries
4.Comparative advantage measures static advantage but not any dynamic advantage for example in the future India could become good at producing books if it made the necessary investment
Limitations of the Theory of Comparative Advantage:
1.Transport costs may outweigh any comparative advantage
2.Increased specialisation may lead to diseconomies of scale - diminishing returns
3.Governments may restrict trade
*1 (a) Many countries have experienced a substantial rise in their fiscal deficits since
2008. Assess the factors which might explain this trend in the public finances of a
country of your choice.
(20)
Timed Essay:
Homework:
Assess the costs and benefits of specialisation and international trade. (30)
5.External costs are not shown
6.Exchange rates
7.Specialisation may cause large structural unemployment
8.Are the PPF's linear? Increased opportunity costs associated with specialisation
Trading
Game
You are an island in the Philippines and you grow lots of coconuts.
One day all the islands realise they are a bit bored with coconuts and what they really need to do is grow some papayas as well.
They found that each island has a different
opportunity cost
of growing papayas
Rules:
You will be given an amount of coconuts - this is how much you can produce in a year.
You will then be told your
opportunity cost
of producing papayas, expressed in terms of coconuts.
The game will take place over two stages.
1. You decide how to
specialise
your production
2. You find another island to trade with
The objective is to come out on top.
M:\Emanuel\Economics\A2\Autumn Term\Week 3
By the end of the lesson you will be able to:
1. understand the significance of specialisation and international trade.
2. Evaluate the significance of David Ricardo's theory of comparative advantage
Other trade theories:
1. Competitive advantage
2. Factor endowment theory
3. Preference similarity theory
Extension:
Draw a PPF using totals before and after trade
Full transcript