Cambridge International as and a level Economics Ebook

Table 4.5 
Absolute advantage: specialisation and trade
Figure 4.20 
Absolute advantage
Coffee tonnes
Indonesia
Brazil
200
200
500
500
Rice tonnes
Absolute advantage: 
used in the context of international 
trade, a situation where, for a given set of resources, one 
country can produce more of a particular product than 
another country.
KEY TERM
Comparative advantage: 
used in the context of 
international trade, a situation where a country can produce 
a product at a lower opportunity cost than another country.
KEY TERM
102

---

Chapter 4: The macroeconomy 
a coat has to be sacrifi ced, In contrast, in the USA, the 
opportunity cost of producing a shirt is two-fi ft hs of a 
coat. 
Table 4.6
shows how specialisation increases output 
by 1,000 units.
Despite its importance, comparative advantage does 
not provide a full explanation of the pattern of global 
trade. Th
ere are a number of reasons for this. Some 
governments may want to avoid overspecialisation, 
transport costs may off set the comparative advantage, 
the exchange rate may not lie between the opportunity 
cost ratios and other governments may impose trade 
restrictions.
Th
e theory of comparative advantage also assumes that 
resources are mobile and that there are constant returns. 
If the USA did decide to double its output of coats, there 
is no guarantee that workers and other resources will be 
able to switch from making shirts to making coats. Even 
if they are able to do so, it also does not necessarily mean 
that the extra resources will be as productive as those fi rst 
employed and so using double the resources may not lead 
to double the output.
In addition, countries do not always adapt to changes 
in comparative advantage. For example, over time a 
country may continue to produce steel despite another 
country being relatively more effi
cient at producing it. 
In such a case, those involved in steel production in 
the country that has lost the comparative advantage 
may try to persuade their government to impose trade 
restrictions on steel imported from the country that has 
now gained the comparative advantage. In a world with 
many countries and a vast number of products, it may 
be diffi
cult to determine where a country’s comparative 
advantage lies.