Comparative Advantage Theory

Drawbacks of C/A

1. Assumes free trade. 2. Assumes perfect occupational mobility. 3. 2 country 2 good model is oversimplistic. 4. Ignores expensive transport costs or protectionist measures.

CA 3 stage process

1. Before specialization. 2. After specialization. 3. After trade.

What to include in a C/A 15 marker

1. Draw a table or PPF 2. Explain who has the comparative advantage. 3. Leads to specialization - define. 4. Output will increase according to Smith's pins. 5. ER is set between 2 opportunity cost ratios. 6. Terms of trade agreed. Both will benefit from trade. = benefits of trade.

Benefits of free trade

1. Greater choice of product. 2. Increased competition. 3. Efficient supply. 4. Speeds up technological progress and innovation. 5. Economies of scale. 6. Political benefits.

15 marker that includes C/A

Benefits of trade, C/A theory, explain in 25 marker about benefits of globalization but without diagrams.

How is an exchange rate set in CA

Between the two opportunity cost ratios.

What does C/A show

Gains from trade.

What is the link between comparative advantage and globalization?

Globalisation is allowing for specialization according to a country's comparative advantage.

c/a table

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Comparative Advantage

One country has an absolute advantage in both goods, but is more productively efficient and has a lower opportunity cost ratio in one good.