Using the principle of comparative advantage, explain why economic theory suggests that countries should specialize and trade with each other.

1. Demands of the question

The demands of the questions is  to explain “why economic theory suggets that countries should specialize and trade with each other” using comparative advantage in 20 minutes. You need definitions, diagrams and explanation of comparative advantage, and  real life examples of specialization. The steps in the diagram must be clearly explained to show the benefits of specialization in the diagram, and relevant real life examples should be used to effectively explain the reasons of international trade.

2. Definition

Factor endowments – factors of production that a country has available to produce goods and services.

Free trade: International trade that takes place without trading barriers (tariff, quota, subsidy)

Comparative Advantage: A country has comparative advantage when they are able to produce a certain output with less opportunity cost.

Specialization: When a country specializes in the production of goods and services where they have a comparative advantage in production.

3. Triple A

• Different factor endowments – some economies are rich in natural resources while others have relatively little. Trade enables economies to specialise in the export of some resources and earn revenue to pay for imports of other goods.
• Increased welfare – specialisation (where countries have a comparative advantage and trade allow countries to gain a higher level of consumption than they would do domestically and this leads to increased welfare and higher living standards.
• Comparative advantage exists when one country is able to produce a good more cheaply, in comparison to other goods produced domestically, than another country.
• Comparative advantage is a principle of economics which states that trade between two countries will be mutually beneficial as long as their domestic opportunity costs of production differ.

• Consumption increases through specialisation and trade compared to a situation of self-sufficiency.

4. Relevant PP Slides

5. Evaluation suggestions

Evaluation not needed.

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