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
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.
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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.
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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)
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Assumptions:
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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
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