comparative advantage

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  • 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


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