comparative advantage
- Created by: Fi Alade
- Created on: 02-04-14 13:58
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- Comparative advantage
- ability of one country to produce a good at a lower opportunity cost than another
- based on assumptions:
- constant costs of production
- zero transport costs
- cost of transporting goods can cancel out savings made by comparative advantage
- no barriers to trade
- there are only two economies producing two gods
- traded goods are homogenous
- steel is steel but a Toyota is not a Ford
- perfect knowledge
- knowledge of who produces goods cheapest internationally
- increases global output
- specialisation
- only if comparative costs are different
- Terms of trade
- ration of the average price of a country's exports to the average price of the country's imports
- for trade to be beneficial terms of trade must lie between the two OC ratios
- Why it works
- labour theory of value
- all costs can be reduced to labour costs
- capital stocks
- labour theory of value
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