• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

Suppose 1 country was more efficient at producing both products. Discuss whether it is the case that specialisation and trade will always benefit both countries.

Extracts from this document...

Introduction

´╗┐Suppose 1 country was more efficient at producing both products. Discuss whether it is the case that specialisation and trade will always benefit both countries. When 1 country is more efficient at producing both products, specialisation and trade will still benefit both countries to a large extent if there are differing opportunity costs between the 2 countries. When 1 country has lower opportunity costs in producing the good than the other, it means that it has a comparative advantage. This is explained in the table below. Assume 2 countries have the same amount of labour: 100 workers. The table below represents the output of 2 different goods they produce. Guns (50 labourers) Roses (50 labourers) ...read more.

Middle

However the opportunity cost of producing a gun in country A is 2 roses whereas the opportunity cost of producing a gun in country B is 3 roses. This means that A has a comparative advantage in producing guns. Thus A should specialise in producing guns and B in roses and trade can still be beneficial. This can be elaborated with an example. Imagine after specialisation, A will produce 200 guns and B will produce 300 roses. Now A decides to trade at an exchange rate of 1 gun for 2.5 roses and decides to trade 100 guns and gain 250 roses. ...read more.

Conclusion

Secondly, even with comparative advantages and specialisation, the exchange rate of the 2 goods must lie between the 2 countries? opportunity costs. In this particular case, for trade to be beneficial for both countries, the exchange rate should be 2 roses < 1 gun < 3 roses. Lastly, the theory of comparative advantage assumes constant opportunity costs within an economy (straight line PPC curves). However, in real life, it is usually not so as opportunity costs are increasing (convex PPC). Therefore with increasing opportunity costs in a country, specialisation may not benefit after all as we are sacrificing efficiency, substituting less efficient factors of production for more efficient ones. ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our AS and A Level Macroeconomics section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related AS and A Level Macroeconomics essays

  1. Free trade and protectionism

    is made larger. The government will also gain revenue from the tariff equivalent to the blue region. However, from the graph, we can see that the loss to consumers is greater than the gains by producers and the government, and this societal loss is equal to the two pink triangles.

  2. Governments set economic objectives - Discuss the relative importance of each of these objectives ...

    If an economy grows too quickly, especially if it is due to excessive consumer spending as it tends to be in the UK, then demand will outstrip supply and prices will rise. Equally, the steps taken to keep inflation low, like relatively high interest rates, can often restrict growth via reduced consumer spending and investment.

  1. In a 2 country world, 1 is more efficient at producing 1 product and ...

    Assuming both countries A and B decide to specialise and devote all their labourers to produce the good they are efficient in producing, the world output will actually increase from 160 -200 for guns and 300 ? 400 for roses.

  2. Structured Response a) + b) on Absolute Advantage, Comparative Advantage and Trade ( [8] ...

    be able to consume more than if they would not have been able to trade. This is then beneficial by allowing for a more efficient use of the scare resources available, helping ease the basic economic problem, which, in turn, allows for a higher level of consumption of the goods

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work