Absolute advantage and comparitive advantage
Limitations
- Transport costs may outweigh any comparative advantage (transport water weighs a lot) -Governments may restrict trade *protectionism* - Over specialisation may induce dis economise of scale - Infant industries may not be able to establish
Advantages of international trade
-*Encourages specialisation*, this *increases output* and scarce resources will be allocated efficiently -*prices of products should fall* -*higher living standards*, more consumption , real GDP will increase -*greater choice*, more products available to households
More advantages
-Producers have access to more markets, could expand and become "economies of scale" - *increased levels of competition* more pressure to produce efficiently. - Increases domestic income - political and cultural advantages (post war Europe)
graph
France is more productive in both cheese and wine , both countries can benefit through specialisation and as each country should specialise in producing the product they have the lower opportunity cost.
relative opportunity cost
The cost of production of one product in terms of sacrificed output of another product.
Trade ratio
This is worked out by finding a ratio in between , so 1:5 is in between 1:3 and 1:7.
Absolute advantage
Where a country can produce a product at a lower cost and more efficiently when specialising than other countries
Comparative advantage
Where a country can produce a product at a lower relative opportunity cost than others.
absolute advantage graph
country A has an absolute advantage in the production of good A and can produce from the same resources more than country B, while B has an advantage in good B
working out
let's say hypothetically France is 1:3 and Poland is 1:7 (even though its 3:4 and 1:3) , Poland has comparative advantage of cheese, while France has advantage of wine.
Trading possibility curve (TPC)
representation of all the combinations of two products that can be consumed in a country if it engages in international trade.