Film and Ben INTERNATIONAL TRADE Absolute Advantage Definition

Film and Ben INTERNATIONAL TRADE

Absolute Advantage Definition: Absolute Advantage exists when a country is able to produce a good more cheaply in than another country

‘Pre-specialisation' situation

COMPARATIVE ADVANTAGE � When a country has a margin of superiority compared to another country at producing g/s. � Such as opportunity cost of production is lower. � Countries will specialize and export products which use intensively the factor of productions which they are most provided with.

� The result from specialization is the increase in total output and economic welfare. � Countries will specialize in products which have the lowest opportunity cost of production.

� Benefit of specialization greater when the country reach economies of scale. � To start trading, 2 countries have to set an exchange rate considering the opportunity cost ratio of one another. (Terms of trade)

Assumptions: � � � � � Perfect occupational mobility of factors of production resources used in one industry can be switched into another without any loss of efficiency Constant returns to scale (i. e. doubling the inputs in each country leads to a doubling of total output) No externalities arising from production and/or consumption Transportation costs are ignored Increase specialisation doesn’t lead to diseconomies of scale No Trade barriers Type of goods Identical goods being traded Stable exchange rates Demand for extra output produced.

� Comparative advantage is a dynamic concept. � Factors that effect demand & supply: 1. The quantity and quality of factors of production available 2. Investment in research & development 3. Movements in the exchange rate. 4. Long-term rates of inflation. 5. Import controls such as tariffs and quotas 6. Non-price competitiveness of producers