Limitations Of The Theories Of Absolute And Comparative Advantage
Economics notes
Limitations Of The Theories Of Absolute And Comparative Advantage
➡️ Changes in the terms of trade can have a significant impact on a country's economic output.
➡️ A change in the terms of trade can lead to an increase or decrease in the price of a country's exports relative to its imports, which can affect the country's balance of payments.
➡️ Changes in the terms of trade can also affect the level of economic activity in a country, as a change in the terms of trade can lead to an increase or decrease in the demand for a country's exports, which can have a positive or negative effect on the country's economic output.
What are the limitations of the theory of absolute advantage in explaining international trade?
The theory of absolute advantage assumes that countries specialize in producing goods in which they have an absolute advantage, and trade with other countries to obtain goods in which they do not have an advantage. However, this theory does not take into account the fact that some countries may have a natural advantage in producing certain goods due to factors such as climate, geography, or access to natural resources. Additionally, the theory does not consider the impact of economies of scale, which can lead to lower production costs and increased competitiveness.
What are the limitations of the theory of comparative advantage in explaining international trade?
The theory of comparative advantage suggests that countries should specialize in producing goods in which they have a comparative advantage, meaning they can produce at a lower opportunity cost than other countries. However, this theory assumes that there are no barriers to trade, such as tariffs or quotas, which can distort comparative advantage. Additionally, the theory does not consider the impact of technological change, which can shift comparative advantage over time.
How do the limitations of the theories of absolute and comparative advantage affect international trade policy?
The limitations of these theories suggest that trade policy should not be based solely on the principle of free trade. Instead, policymakers should consider the impact of factors such as natural resources, economies of scale, and technological change on comparative advantage. Additionally, trade policy should take into account the potential for trade barriers to distort comparative advantage and the need for policies to address the negative effects of trade on certain industries or regions.