Presentation on theme: "at the end of the lesson you should be able to: identify the 3 conditions of identify the 3 conditions of trade trade identify the limitations of identify."— Presentation transcript:
at the end of the lesson you should be able to: identify the 3 conditions of identify the 3 conditions of trade trade identify the limitations of identify the limitations of the theory of the theory of absolute/comparative absolute/comparative advantage advantage
Conditions of trade: 1)The terms of trade (TOT) must lie between the two domestic opportunity cost ratios 2)The exchange rate (ER) must lie between the two domestic opportunity cost 3) The O.C. ratios must differ
Limitations of theory: 1. Non price theory Trade is not necessarily based on price alone but other non-price aspects such as quality High costs producers can still sell their goods if their quality is better
Limitations of theory: 2. Perfect factor mobility In practice, there is likely to be a certain amount of factor immobility. when country X shifts production from cloth to wheat, labour is not easily redeployed to the wheat industry causes unemployment in cloth industry
Limitations of theory: 3. Constant cost is unlikely theory is ignoring the possibility of diseconomies of scale (DEOS) and diminishing returns as output expands which can lead to higher average cost On the other hand, increasing returns can lead to lower average cost
Limitations of theory: 4Barriers to trade and transport cost trade barriers such as the imposition of tariffs and quotas transportations cost etc. have not been factored into model. these cause SS to fallP may restrict trade n specialization
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