Economics Comparative Advantage Questions
The limitations of comparative advantage include:
1. Assumption of constant costs: Comparative advantage assumes that the costs of production remain constant, regardless of the quantity produced. However, in reality, costs can change due to factors such as economies of scale, technological advancements, or changes in input prices.
2. Ignoring transportation costs: Comparative advantage assumes that there are no transportation costs involved in trading goods between countries. In reality, transportation costs can significantly impact the comparative advantage of a country, especially for goods with high weight or perishable nature.
3. Inability to account for non-tradable goods: Comparative advantage focuses on the production of tradable goods, but it does not consider non-tradable goods and services, which can be significant contributors to a country's economy. This limitation can lead to an incomplete understanding of a country's overall economic performance.
4. Disregarding externalities: Comparative advantage does not consider externalities, such as environmental pollution or social costs, which can arise from the production of certain goods. This limitation can result in an overemphasis on industries with comparative advantage, even if they have negative impacts on society or the environment.
5. Lack of consideration for income distribution: Comparative advantage assumes that gains from trade will be distributed evenly among all individuals within a country. However, in reality, trade can lead to winners and losers, with some individuals or industries benefiting more than others. This limitation highlights the need for policies to address income distribution and potential inequalities resulting from trade.
Overall, while comparative advantage is a useful concept in understanding international trade, it is important to recognize its limitations and consider other factors that can influence trade patterns and economic outcomes.