2. TUTOR2U.NET/ECONOMICS SPECIALISATION AND TRADE WHAT IS SPECIALISATION AT A MACRO LEVEL? International specialisation in economics refers to where countries or regions focus on producing and exporting specific goods or services in which they have a comparative advantage, while importing other goods or services that they can acquire more efficiently from trading partners. This specialisation allows countries to allocate their scarce factor resources more efficiently, improve overall productivity, and hopefully benefit from the gains of trade across borders. International specialisation in economics refers to where countries or regions focus on producing and exporting specific goods or services in which they have a comparative advantage, while importing other goods or services that they can acquire more efficiently from trading partners. This specialisation allows countries to allocate their scarce factor resources more efficiently, improve overall productivity, and hopefully benefit from the gains of trade across borders.

3. TUTOR2U.NET/ECONOMICS SPECIALISATION AND TRADE EXAMPLES OF TRADE SPECIALISATION Oil Exporting Countries: Countries like Saudi Arabia and Venezuela specialize in the production and export of oil due to their abundant natural resources Agricultural Specialisation: Ethiopia is a major exporter of coffee due to its favorable climate for coffee cultivation. Textile and Apparel Industry: Countries like Bangladesh and Vietnam have specialized in textile and apparel manufacturing due to their relatively low labour costs and skilled workforce Medical Tourism: Countries like Thailand and India have specialised in medical tourism, offering high-quality medical procedures and treatments at lower costs compared to some Western countries. Oil Exporting Countries: Countries like Saudi Arabia and Venezuela specialize in the production and export of oil due to their abundant natural resources Agricultural Specialisation: Ethiopia is a major exporter of coffee due to its favorable climate for coffee cultivation. Textile and Apparel Industry: Countries like Bangladesh and Vietnam have specialized in textile and apparel manufacturing due to their relatively low labour costs and skilled workforce Medical Tourism: Countries like Thailand and India have specialised in medical tourism, offering high-quality medical procedures and treatments at lower costs compared to some Western countries.

4. TUTOR2U.NET/ECONOMICS SPECIALISATION AND TRADE TRADE SPECIALISATION: BANGLADESH

5. TUTOR2U.NET/ECONOMICS SPECIALISATION AND TRADE TRADE SPECIALISATION: SOUTH KOREA

6. TUTOR2U.NET/ECONOMICS SPECIALISATION AND TRADE TRADE SPECIALISATION: MEXICO

7. TUTOR2U.NET/ECONOMICS SPECIALISATION AND TRADE TRADE SPECIALISATION: ANGOLA

8. TUTOR2U.NET/ECONOMICS SPECIALISATION AND TRADE WHAT IS COMPARATIVE ADVANTAGE? Comparative advantage helps explain the benefits of specialisation and trade between individuals, firms, or countries. It arises when one party can produce a good or service at a relatively lower opportunity cost than another party. In simpler terms, it's about assessing which activity a party is relatively more efficient at producing compared to other activities. The concept was introduced by British economist David Ricardo in the early 19th century as part of his theory of international trade. Comparative advantage helps explain the benefits of specialisation and trade between individuals, firms, or countries. It arises when one party can produce a good or service at a relatively lower opportunity cost than another party. In simpler terms, it's about assessing which activity a party is relatively more efficient at producing compared to other activities. The concept was introduced by British economist David Ricardo in the early 19th century as part of his theory of international trade.

9. TUTOR2U.NET/ECONOMICS SPECIALISATION AND TRADE DAVID RICARDO AND COMPARATIVE ADVANTAGE David Ricardo was one of the founding fathers of classical economics. He developed the idea of comparative advantage Comparative advantage exists when: 1.The relative opportunity cost of production for a good or service is lower in one nation than in another country. 2.A country is relatively more productively efficient than another. Basic rule: Specialise a country’s scarce factor resources in goods and services that they are relatively best at. This opens potential gains from specialisation and trade which leads to improved economic welfare. David Ricardo (1772-1823)

10. TUTOR2U.NET/ECONOMICS SPECIALISATION AND TRADE TRADE AND COMPARATIVE ADVANTAGE (EXAMPLE) Output LCD screens E-vehicle chargers Germany600450 South Korea 1200600 Total Germany and South Korea can produce both LCD screens and e-vehicle chargers. The labour input and other inputs are initially divided equally between the two countries. The table shows the resulting weekly output of LCD screens and e-vehicle chargers

11. TUTOR2U.NET/ECONOMICS SPECIALISATION AND TRADE TRADE AND COMPARATIVE ADVANTAGE (EXAMPLE) Output LCD screens E-vehicle chargers Germany600450 South Korea 1200600 Total18001050 Germany and South Korea can produce both LCD screens and e-vehicle chargers. The labour input and other inputs are initially divided equally between the two countries. The table shows the resulting weekly output of LCD screens and e-vehicle chargers

12. TUTOR2U.NET/ECONOMICS SPECIALISATION AND TRADE TRADE AND COMPARATIVE ADVANTAGE (EXAMPLE) Output LCD screens E-vehicle chargers Germany600450 South Korea 1200600 Total18001050 The opportunity cost of Germany producing an extra e-vehicle charger is 600/450 = 1.3 LCD screens

13. TUTOR2U.NET/ECONOMICS SPECIALISATION AND TRADE TRADE AND COMPARATIVE ADVANTAGE (EXAMPLE) Output LCD screens E-vehicle chargers Germany600450 South Korea 1200600 Total18001050 The opportunity cost of Germany producing an extra e-vehicle charger is 600/450 = 1.3 LCD screens The opportunity cost of South Korea producing an extra e-vehicle charger is 1200/600 = 2 LCD screens

14. TUTOR2U.NET/ECONOMICS SPECIALISATION AND TRADE TRADE AND COMPARATIVE ADVANTAGE (EXAMPLE) Output LCD screens E-vehicle chargers Germany600450 South Korea 1200600 Total18001050 Now both countries specialise in the product in which they have a comparative advantage Germany shifts resources into e-vehicle chargers South Korea focuses their factor inputs on LCD screens Now both countries specialise in the product in which they have a comparative advantage Germany shifts resources into e-vehicle chargers South Korea focuses their factor inputs on LCD screens

15. TUTOR2U.NET/ECONOMICS SPECIALISATION AND TRADE TRADE AND COMPARATIVE ADVANTAGE (EXAMPLE) Output LCD screens E-vehicle chargers Germany0900 South Korea 1200600 Total18001050 Now both countries specialise in the product in which they have a comparative advantage Germany shifts resources into e-vehicle chargers South Korea focuses their factor inputs on LCD screens Now both countries specialise in the product in which they have a comparative advantage Germany shifts resources into e-vehicle chargers South Korea focuses their factor inputs on LCD screens Germany doubles production of e-vehicle chargers and stops producing LCD screens – total output rises to 900

16. TUTOR2U.NET/ECONOMICS SPECIALISATION AND TRADE TRADE AND COMPARATIVE ADVANTAGE (EXAMPLE) Output LCD screens E-vehicle chargers Germany0900 South Korea 2000200 Total20001100 Germany doubles production of e-vehicle chargers and stops producing LCD screens – total output rises to 900 South Korea gives up 400 e- vehicle chargers and shifts resources into LCD screens – the opportunity cost is 2:1 – so South Korea can add 800 to their output of LCD screens, taking total output to 2000

17. TUTOR2U.NET/ECONOMICS SPECIALISATION AND TRADE TRADE AND COMPARATIVE ADVANTAGE (EXAMPLE) Output LCD screens E-vehicle chargers Germany0900 South Korea 2000200 Total20001100 Overall, specialisation has increased total output of both products. This is called a gain from specialisation based on comparative advantage. Overall, specialisation has increased total output of both products. This is called a gain from specialisation based on comparative advantage.

18. TUTOR2U.NET/ECONOMICS SPECIALISATION AND TRADE TRADE AND COMPARATIVE ADVANTAGE (EXAMPLE) Output LCD screens E-vehicle chargers Germany0900 South Korea 2000200 Total20001100 Overall, specialisation has increased total output of both products. This is called a gain from specialisation based on comparative advantage. Overall, specialisation has increased total output of both products. This is called a gain from specialisation based on comparative advantage. The two countries need to find a mutually beneficial terms of trade – in other words, a trade of LCD screens for e-vehicle chargers that benefits both countries

19. TUTOR2U.NET/ECONOMICS SPECIALISATION AND TRADE TRADE AND COMPARATIVE ADVANTAGE (EXAMPLE) Output LCD screens E-vehicle chargers Germany0900 South Korea 2000200 Total20001100 WITHOUT TRADE Germany swaps 60 LCD screens for 45 e-vehicle chargers Opportunity cost = 1.3 WITHOUT TRADE Germany swaps 60 LCD screens for 45 e-vehicle chargers Opportunity cost = 1.3 WITHOUT TRADE South Korea swaps 120 LCD screens for 60 e-vehicle chargers Opportunity cost = 2 WITHOUT TRADE South Korea swaps 120 LCD screens for 60 e-vehicle chargers Opportunity cost = 2

20. TUTOR2U.NET/ECONOMICS SPECIALISATION AND TRADE TRADE AND COMPARATIVE ADVANTAGE (EXAMPLE) Output LCD screens E-vehicle chargers Germany0900 South Korea 2000200 Total20001100 WITHOUT TRADE Germany swaps 60 LCD screens for 45 e-vehicle chargers Opportunity cost = 1.3 WITHOUT TRADE Germany swaps 60 LCD screens for 45 e-vehicle chargers Opportunity cost = 1.3 WITHOUT TRADE South Korea swaps 120 LCD screens for 60 e-vehicle chargers Opportunity cost = 2 WITHOUT TRADE South Korea swaps 120 LCD screens for 60 e-vehicle chargers Opportunity cost = 2 If they trade at 3:2 then both countries can benefit because 3:2 lies within the internal opportunity cost ratio for both countries If they trade at 3:2 then both countries can benefit because 3:2 lies within the internal opportunity cost ratio for both countries

21. TUTOR2U.NET/ECONOMICS SPECIALISATION AND TRADE TRADE AND COMPARATIVE ADVANTAGE (EXAMPLE) Output LCD screens E-vehicle chargers Germany630480 South Korea 1370620 Total20001100 South Korea exports 630 LCD screens to Germany In exchange they get (630 / 3) x 2 e-vehicle chargers Because they give up 3 screens for 2 charges South Korea gets 420 e- vehicle chargers from Germany. South Korea exports 630 LCD screens to Germany In exchange they get (630 / 3) x 2 e-vehicle chargers Because they give up 3 screens for 2 charges South Korea gets 420 e- vehicle chargers from Germany.

22. TUTOR2U.NET/ECONOMICS SPECIALISATION AND TRADE COMPARATIVE ADVANTAGE – WORKED EXAMPLE Beef Raw Tobacco Australia Malawi 500 250 200 100 150 300 200 400 Output with ½ of all available factor resources allocated to each industry in both countries BeefTobacco Opportunity Cost Ratio Australia2502005:4 Malawi10015010:15 Total350 Australia has a comparative advantage in producing Beef. This is because the opportunity cost of an extra unit of beef is 4/5 th unit of tobacco, whereas for Malawi, the opportunity cost is 1.5 units of tobacco. Malawi has a comparative advantage in producing tobacco – the opportunity cost of an extra unit of tobacco is 2/3rd of beef, whereas for Australia it is 5/4.

23. TUTOR2U.NET/ECONOMICS SPECIALISATION AND TRADE COMPARATIVE ADVANTAGE – WORKED EXAMPLE Beef Raw Tobacco Australia Malawi 500 250 200 100 150 300 200 400 If both countries specialise according to the law of comparative advantage, and assuming constant returns to scale, then total output of both products (beef and tobacco) can increase. Output after specialisation has taken place BeefTobacco Australia400 (+150)80 (-120) Malawi0 (-100)300 (+150) Total400 (+50)380 (+30)

24. TUTOR2U.NET/ECONOMICS SPECIALISATION AND TRADE COMPARATIVE ADVANTAGE – WORKED EXAMPLE Beef Raw Tobacco Australia Malawi 500 250 200 100 150 300 200 400 If both countries trade at a mutually beneficial terms of trade of 1 Beef for 1 tobacco – they can both end up with more of both products than without trade. Output after trade has taken place BeefTobacco Australia270210 Malawi130170 Total400380 Australia exports 130 units of beef Australia trades for 130 units of tobacco with Malawi The terms of trade are set at 1B:1T Australia exports 130 units of beef Australia trades for 130 units of tobacco with Malawi The terms of trade are set at 1B:1T

25. TUTOR2U.NET/ECONOMICS SPECIALISATION AND TRADE Beef Raw Tobacco Australia Malawi 500 250 200 100 150 300 200 400 If both countries trade at a mutually beneficial terms of trade of 1 Beef for 1 tobacco – they can both end up with more of both products than without trade. Output after trade has taken place BeefTobacco Australia270 (+20)210 (+10) Malawi130 (+30)170 (+20) Total400380 Australia exports 130 units of beef Australia trades for 130 units of tobacco with Malawi The terms of trade are set at 1B:1T Australia exports 130 units of beef Australia trades for 130 units of tobacco with Malawi The terms of trade are set at 1B:1T 500

26. TUTOR2U.NET/ECONOMICS SPECIALISATION AND TRADE Beef Raw Tobacco Australia Malawi 500 250 200 100 150 300 200 400 If both countries trade at a mutually beneficial terms of trade of 1 Beef for 1 tobacco – they can both end up with more of both products than without trade. Output after trade has taken place BeefTobacco Australia270 (+20)210 (+10) Malawi130 (+30)170 (+20) Total400380 Australia exports 130 units of beef Australia trades for 130 units of tobacco with Malawi The terms of trade are set at 1B:1T Australia exports 130 units of beef Australia trades for 130 units of tobacco with Malawi The terms of trade are set at 1B:1T 500 300

27. TUTOR2U.NET/ECONOMICS SPECIALISATION AND TRADE ASSUMPTIONS OF COMPARATIVE ADVANTAGE MODEL

28. TUTOR2U.NET/ECONOMICS SPECIALISATION AND TRADE FACTORS AFFECTING COMPARATIVE ADVANTAGE

29. TUTOR2U.NET/ECONOMICS SPECIALISATION AND TRADE ASSUMPTIONS OF COMPARATIVE ADVANTAGE MODEL Key assumptions behind trade theory are as follows: 1.Constant returns to scale – no economies of scale. 2.Factor mobility between industries (geographical + occupational mobility), workers are assumed to be equally productive in whatever job they do 3.No trade barriers such as import tariffs and quotas 4.Low transportation costs to get products to market 5.No externalities from production and/or consumption Mutually beneficial terms of trade is not necessarily one that benefits both countries equally – the benefits may be unbalanced Key assumptions behind trade theory are as follows: 1.Constant returns to scale – no economies of scale. 2.Factor mobility between industries (geographical + occupational mobility), workers are assumed to be equally productive in whatever job they do 3.No trade barriers such as import tariffs and quotas 4.Low transportation costs to get products to market 5.No externalities from production and/or consumption Mutually beneficial terms of trade is not necessarily one that benefits both countries equally – the benefits may be unbalanced

30. TUTOR2U.NET/ECONOMICS SPECIALISATION AND TRADE FACTORS AFFECTING COMPARATIVE ADVANTAGE Comparative advantage is a dynamic concept - it changes over time 1.Quantity and quality of natural resources available 2.Demographics – factors such as an ageing population, net migration, levels of women’s participation in the labour force 3.Rates of capital investment including infrastructure spending 4.Investment in research which can drive business innovation 5.Fluctuations in the exchange rate which then affect prices of both exports and imports 6.Import controls such as import tariffs, export subsidies and quotas used to create an artificial comparative advantage 7.Non-price competitiveness of producers – such as product design, innovation, reliability, branding & technical standards. Comparative advantage is a dynamic concept - it changes over time 1.Quantity and quality of natural resources available 2.Demographics – factors such as an ageing population, net migration, levels of women’s participation in the labour force 3.Rates of capital investment including infrastructure spending 4.Investment in research which can drive business innovation 5.Fluctuations in the exchange rate which then affect prices of both exports and imports 6.Import controls such as import tariffs, export subsidies and quotas used to create an artificial comparative advantage 7.Non-price competitiveness of producers – such as product design, innovation, reliability, branding & technical standards.

31. TUTOR2U.NET/ECONOMICS SPECIALISATION AND TRADE GAINS FROM TRADE – ECONOMIC EFFICIENCY Economic efficiencyPossible impact of trade on economic efficiency Allocative efficiency Competition from lower-cost import sources drives market prices down closer to marginal cost. Lower prices reduces the level of monopoly profits and increases real incomes. Productive efficiency Specializing and selling in larger markets encourages increasing returns to scale (internal economies of scale) leading to a lower long run average cost of production. Dynamic efficiency Economies that are open to trade may see growing numbers of innovative businesses who invest more in research and development and in the human capital of their workforce which can help raise labour productivity. X-inefficiency Intense competition in markets provides a discipline on businesses to keep their operating costs under control and reduce waste to remain price competitive and profitable.

32. TUTOR2U.NET/ECONOMICS SPECIALISATION AND TRADE GAINS FROM TRADE – OVERVIEW

33. Consider some possible gains from trade by opening the UK timber market to overseas imports

34. Price of Timber Output of Timber Demand for Timber (UK) Supply of Timber (UK) PT1 QT1 TUTOR2U.NET/ECONOMICS SPECIALISATION AND TRADE

35. Price of Timber Output of Timber Demand for Timber (UK) Supply of Timber (UK) PT1 QT1 PT1 and QT1 is the domestic equilibrium price in the absence of overseas trade TUTOR2U.NET/ECONOMICS SPECIALISATION AND TRADE

36. Price of Timber Output of Timber Demand for Timber (UK) Supply of Timber (UK) PT1 QT1 World Supply World Supply Price Now assume that timber can be bought at a lower world price because other countries have cheaper costs of supply TUTOR2U.NET/ECONOMICS SPECIALISATION AND TRADE

37. Price of Timber Output of Timber Demand for Timber (UK) Supply of Timber (UK) PT1 QT1 World Supply World Supply Price Trade creates competition – UK timber suppliers might have to price at or around the prevailing world price. TUTOR2U.NET/ECONOMICS SPECIALISATION AND TRADE

38. Price of Timber Output of Timber Demand for Timber (UK) Supply of Timber (UK) PT1 QT1 World Supply World Supply Price S1D1 Domestic production may contract from QT1 to S1 at the world price TUTOR2U.NET/ECONOMICS SPECIALISATION AND TRADE

39. Price of Timber Output of Timber Demand for Timber (UK) Supply of Timber (UK) PT1 QT1 World Supply World Supply Price S1D1 Domestic consumers can now buy timber at a cheaper price, so demand expands from QT1 to D1 TUTOR2U.NET/ECONOMICS SPECIALISATION AND TRADE

40. Price of Timber Output of Timber Demand for Timber (UK) Supply of Timber (UK) PT1 QT1 World Supply World Supply Price S1D1 One result is that the quantity of imported timber coming into the market becomes quantity S1D1 TUTOR2U.NET/ECONOMICS SPECIALISATION AND TRADE

41. Price of Timber Output of Timber Demand for Timber (UK) Supply of Timber (UK) PT1 QT1 World Supply World Supply Price S1D1 A B C D E F G Develop the analysis by thinking about the impact on consumer and producer welfare and overall economic welfare. TUTOR2U.NET/ECONOMICS SPECIALISATION AND TRADE

42. Price of Timber Output of Timber Demand for Timber (UK) Supply of Timber (UK) PT1 QT1 World Supply World Supply Price Consumer surplus without trade: ABG Consumer surplus with trade: ACD Gain of GBCD S1D1 A B C D E F G TUTOR2U.NET/ECONOMICS SPECIALISATION AND TRADE

43. Price of Timber Output of Timber Demand for Timber (UK) Supply of Timber (UK) PT1 QT1 World Supply World Supply Price Consumer surplus without trade: ABG Consumer surplus with trade: ACD Producer surplus without trade: GBE Producer surplus with trade: DFE S1D1 A B C D E F G TUTOR2U.NET/ECONOMICS SPECIALISATION AND TRADE

44. Price of Timber Output of Timber Demand for Timber (UK) Supply of Timber (UK) PT1 QT1 World Supply World Supply Price S1D1 A B C D E F G Overall, free trade leads to an increase in welfare if we sum up consumer and producer surplus. Gain = area FBC TUTOR2U.NET/ECONOMICS SPECIALISATION AND TRADE

45. TUTOR2U.NET/ECONOMICS SPECIALISATION AND TRADE RISKS FROM INTERNATIONAL TRADE

46. In 1817, David Ricardo developed the classical theory of comparative advantage. The theory of comparative advantage suggests that countries should A Seek to become self-sufficient B Only trade if each country has an absolute advantage in at least one product C Diversify as much as possible D Only trade if the opportunity costs of production differ between countries In 1817, David Ricardo developed the classical theory of comparative advantage. The theory of comparative advantage suggests that countries should *A Seek to become self-sufficient *B Only trade if each country has an absolute advantage in at least one product *C Diversify as much as possible *D Only trade if the opportunity costs of production differ between countries 1 TUTOR2U.NET/ECONOMICS SPECIALISATION AND TRADE

47. The law of comparative advantage implies that trade between two countries A Is always to the advantage of both countries B Is beneficial to both if the exporter uses less resources than the importer would use to produce the same quantity of goods C Is to the advantage of both if countries import only those goods that they are incapable of producing themselves D Can be to the advantage of both even though one may be more productively efficient at producing everything The law of comparative advantage implies that trade between two countries *A Is always to the advantage of both countries *B Is beneficial to both if the exporter uses less resources than the importer would use to produce the same quantity of goods *C Is to the advantage of both if countries import only those goods that they are incapable of producing themselves *D Can be to the advantage of both even though one may be more productively efficient at producing everything 2 TUTOR2U.NET/ECONOMICS SPECIALISATION AND TRADE

48. If country A can make 40,000 cars or 8 million pencils in one week, while country B can make 18,000 cars or 6 million pencils in one week, which of the following statements is true? A Country B has an absolute advantage in making both cars and pencils B Country A has a comparative advantage in making pencils C Country B has a comparative advantage in making pencils D Country B has a comparative advantage in making cars If country A can make 40,000 cars or 8 million pencils in one week, while country B can make 18,000 cars or 6 million pencils in one week, which of the following statements is true? *A Country B has an absolute advantage in making both cars and pencils *B Country A has a comparative advantage in making pencils *C Country B has a comparative advantage in making pencils *D Country B has a comparative advantage in making cars 3 TUTOR2U.NET/ECONOMICS SPECIALISATION AND TRADE

49. Japan has a comparative advantage over Germany in the production of cars if A the opportunity costs of car production are lower in Japan than Germany B Japan can produce more cars than Germany C Germany has more efficient car production facilities than Japan D the variable costs of car production are lower in Japan than in Germany Japan has a comparative advantage over Germany in production of cars if *A the opportunity costs of car production are lower in Japan than Germany *B Japan can produce more cars than Germany *C Germany has more efficient car production facilities than Japan *D the variable costs of car production are lower in Japan than in Germany 4 TUTOR2U.NET/ECONOMICS SPECIALISATION AND TRADE

50. The diagram below shows the production possibility frontier for two countries each producing two goods, tables and sofas. From the diagram, it can be concluded that A Germany has a comparative advantage in sofas B Germany has a comparative advantage in tables C There are no potential gains from trade between the two countries D France has an absolute advantage in producing both goods The diagram below shows the production possibility frontier for two countries each producing two goods, tables and sofas. From the diagram, it can be concluded that *A Germany has a comparative advantage in sofas *B Germany has a comparative advantage in tables *C There are no potential gains from trade between the two countries *D France has an absolute advantage in producing both goods 5 TUTOR2U.NET/ECONOMICS SPECIALISATION AND TRADE

51. The diagram below illustrates the PPFs for two countries who are free to trade. t is the opportunity cost in each country of producing 100 units of product X? A 200 units of Y in Economy 2 and 400 units of Y in Economy 1 B 400 units of Y in Economy 2 and 200 units of Y in Economy 1 C 400 units of Y in Economy 2 and 100 units of Y in Economy 1 D 200 units of Y in Economy 2 and 100 units of Y in Economy 1 The diagram below illustrates the PPFs for two countries who are free to trade. What is the opportunity cost in each country of producing 100 units of product X? *A 200 units of Y in Economy 2 and 400 units of Y in Economy 1 *B 400 units of Y in Economy 2 and 200 units of Y in Economy 1 *C 400 units of Y in Economy 2 and 100 units of Y in Economy 1 *D 200 units of Y in Economy 2 and 100 units of Y in Economy 1 6 TUTOR2U.NET/ECONOMICS SPECIALISATION AND TRADE

52. Identify the correct answers BUBBLE QUIZ The number of answers that are correct can range from zero to all four!

53. Prices are lower in one country than in another Costs are higher in one country than in another Comparative advantage A The productivity of output is equal in both countries NONE ARE CORRECT! According to the theory of comparative advantage, which of the following are reasons why countries trade? A Identify the correct answers. BCD 1 The productivity of output is equal in both countries Comparative advantage B Costs are higher in one country than in another C Prices are lower in one country than in another D

54. D It fails to show that countries should exploit their natural factor endowments The model is static, ignoring that comparative advantages changes over time It ignores barriers to international trade It assumes perfect mobility of scarce resources NONE ARE CORRECT! Which of the following is a disadvantage of the theory of comparative advantage? A Identify the correct answers. BCD 2 It assumes perfect mobility of scarce resources A It ignores barriers to international trade B The model is static, ignoring that comparative advantages changes over time C It fails to show that countries should exploit their natural factor endowments

55. Ethiopia has a comparative advantage in coffee production In Scotland, the cost of the first unit of coffee production is 1.5 units of salmon B Scotland has a comparative advantage in coffee production In Ethiopia, the cost of the first unit of salmon production is 2 units of coffee NONE ARE CORRECT! The table below shows the maximum amounts of coffee and salmon that Ethiopia and Scotland can produce if they just sell one good. If this is the case, which of the following statements is true? A Identify the correct answers. BCD 3 In Ethiopia, the cost of the first unit of salmon production is 2 units of coffee A Scotland has a comparative advantage in coffee production In Scotland, the cost of the first unit of coffee production is 1.5 units of salmon C Ethiopia has a comparative advantage in coffee production D CoffeeSalmon Ethiopia4020 Scotland1015

56. Costs are higher in one country than in another Prices are lower in one country than in another B The productivity of output is equal in both countries A Both countries have never traded before NONE ARE CORRECT! According to the theory of comparative advantage, which of the following is a reason why countries trade? A Identify the correct answers. BCD 4 Both countries have never traded before The productivity of output is equal in both countries Prices are lower in one country than in another C Costs are higher in one country than in another D