Question

Question 6:    What is the theory of comparative advantage?

Question 7:      Name 4 key limitations to the theory of comparative advantage.

Answer 1

Answer 6. Comparative advantage is when a country produces a good or service for a lower opportunity cost than other countries. Opportunity cost measures a trade-off. A nation with a comparative advantage makes the trade-off worth it. The benefits of buying their good or service outweigh the disadvantages. The country may not be the best at producing something. But the good or service has a low opportunity cost for other countries to import.

Answer 7. limitations to the theory of comparative advantage:

1. Transport costs may outweigh any comparative advantage
2. Increased specialisation may lead to diseconomies of scale
3. Governments may restrict trade
4. Comparative advantage measures static advantage but not any dynamic advantage for example in the future India could become good at producing books if it made the necessary investment