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Economics 4.1.2

Economics- Edexcel 4.1.2

TermDefinition
absolute advantage when a country can supply a product using fewer resources than another nation/a country produces more of a product using the same factors of production
who developed the idea of comparative advantage? David Ricardo
comparative advantage exists when 1)the relative opportunity cost of production for a product is lower in one nation than another 2)country is relatively more productively efficient than another
specialisation due to comparative advantage leads to a more efficient allocation of resources
what condition must there be when trading to have a gain in economic welfare? both countries trade at a mutually beneficial terms of trade
assumptions behind the theory of comparative advantage and trade Constant returns to scale/Factor mobility/No trade barriers/Low transportation costs/No significant externalities
advantages of specialisation and trade deeper specialisation/higher market competition, choice & product quality/reduced prices leading to higher real incomes/better use of scarce resources
what diagram can we use to show gains from trade? supply and demand- looking specifically at consumer and producer surplus
drawbacks of specialisation and trade volatile global prices/geo-political uncertainties/cyclical fluctuations in demand/external demand shock/structural unemployment/import protectionism/natural resource trap
resource curse a paradoxical situation in which a country underperforms economically, despite being home to valuable natural resources
types of economic efficiency allocative, productive, dynamic, X-inefficiency
allocative efficiency an efficient market whereby all goods and services meet the needs and wants of society
productive efficiency when you are using your limited resources to their fullest potential
dynamic efficiency concerned with the productive efficiency of a firm over a period of time
X-inefficiency when a lack of effective competition in an industry means that average costs are higher than they would be if the market was more contestable
possible impact of external trade on productive efficiency specialising in large markets encourages increasing returns to scale leading to lower run average costs of production
possible impact of external trade on allocative efficiency competition from lower-cost import sources drive market prices down closer to marginal cost & reduce level of monopoly profits
possible impact of external trade on dynamic efficiency open economies may see more innovating businesses investing more in research and development & human capital to raise labour productivity
possible impact of external trade on X-inefficiency efficiency intense competition in markets provides discipline on businesses to keep unit costs under control to remain price competitive and profitable
Created by: jessharris
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