IB Economics Topic 4.1.3 Limitations of the Theory of Comparative Advantage Revision Notes (HL)

IB Economics Topic 4.1.3 Limitations of the Theory of Comparative Advantage Revision Notes (HL) | RevisionDojo

While comparative advantage has been used to explain and defend trade liberalisation over the years, it has multiple shortcomings.

Definition

Trade Liberalization

To free up international trade by removing trade barriers.

Unrealistic Assumptions

The theory of comparative advantage assumes ideal conditions that rarely exist in practice. These assumptions include:

Factors of production are fixed

This is highly unlikely as in the real world, factors of production can improve and increase (or decline) over time.
Factors of production can also move from country to country which is assumed to be not possible in this case. However, it does occur in the real world as labour and capital migrate a lot around the world.

Technology is fixed

This assumption is highly unlikely since technology is likely to develop and innovate over time which alters comparative advantage.

Perfect Mobility within a country

This statement assumes that factors of production can be moved easily and without cost from one line of production to another within a country.
However, there are a lot of costs associated with moving factors in real life and many bureaucratic hassles.

Full employment of all resources

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Definition

Paywall

(on a website) an arrangement whereby access is restricted to users who have paid to subscribe to the site.

anim nostrud sit dolore minim proident quis fugiat velit et eiusmod nulla quis nulla mollit dolor sunt culpa aliqua

Lorem ipsum dolor sit amet, consectetur adipiscing elit. Sed do eiusmod tempor incididunt ut labore et dolore magna aliqua. Ut enim ad minim veniam, quis nostrud exercitation ullamco laboris nisi ut aliquip ex ea commodo consequat.

Duis aute irure dolor in reprehenderit

Duis aute irure dolor in reprehenderit in voluptate velit esse cillum dolore eu fugiat nulla pariatur. Excepteur sint occaecat cupidatat non proident, sunt in culpa qui officia deserunt mollit anim id est laborum.

Note

Lorem ipsum dolor sit amet, consectetur adipiscing elit, sed do eiusmod tempor incididunt ut labore et dolore magna aliqua. Ut enim ad minim veniam quis nostrud exercitation.

Excepteur sint occaecat cupidatat non proident

Nemo enim ipsam voluptatem quia voluptas sit aspernatur aut odit aut fugit, sed quia consequuntur magni dolores eos qui ratione voluptatem sequi nesciunt. Neque porro quisquam est, qui dolorem ipsum quia dolor sit amet, consectetur, adipisci velit.

Tip

Lorem ipsum dolor sit amet, consectetur adipiscing elit, sed do eiusmod tempor incididunt ut labore et dolore magna aliqua. Ut enim ad minim veniam, quis nostrud exercitation ullamco laboris nisi ut aliquip ex ea commodo consequat.

Lorem ipsum dolor sit amet, consectetur adipiscing elit.
Sed do eiusmod tempor incididunt ut labore et dolore magna aliqua.
Ut enim ad minim veniam, quis nostrud exercitation ullamco laboris.
Duis aute irure dolor in reprehenderit in voluptate velit esse cillum.

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While comparative advantage has been used to explain and defend trade liberalisation over the years, it has multiple shortcomings.

Definition

Trade Liberalization

To free up international trade by removing trade barriers.

Unrealistic Assumptions

The theory of comparative advantage assumes ideal conditions that rarely exist in practice. These assumptions include:

Factors of production are fixed

This is highly unlikely as in the real world, factors of production can improve and increase (or decline) over time.
Factors of production can also move from country to country which is assumed to be not possible in this case. However, it does occur in the real world as labour and capital migrate a lot around the world.

Technology is fixed

This assumption is highly unlikely since technology is likely to develop and innovate over time which alters comparative advantage.

Perfect Mobility within a country

This statement assumes that factors of production can be moved easily and without cost from one line of production to another within a country.
However, there are a lot of costs associated with moving factors in real life and many bureaucratic hassles.

Full employment of all resources

Definition

Paywall

(on a website) an arrangement whereby access is restricted to users who have paid to subscribe to the site.

anim nostrud sit dolore minim proident quis fugiat velit et eiusmod nulla quis nulla mollit dolor sunt culpa aliqua

Duis aute irure dolor in reprehenderit

Note

Lorem ipsum dolor sit amet, consectetur adipiscing elit, sed do eiusmod tempor incididunt ut labore et dolore magna aliqua. Ut enim ad minim veniam quis nostrud exercitation.

Excepteur sint occaecat cupidatat non proident

Tip

Lorem ipsum dolor sit amet, consectetur adipiscing elit.
Sed do eiusmod tempor incididunt ut labore et dolore magna aliqua.
Ut enim ad minim veniam, quis nostrud exercitation ullamco laboris.
Duis aute irure dolor in reprehenderit in voluptate velit esse cillum.

1. Introduction to Economics2 subtopics

2. Microeconomics12 subtopics

3. Macroeconomics7 subtopics

4. The Global Economy10 subtopics

IB Economics 4.1.3 Limitations of the Theory of Comparative Advantage Notes

1. Introduction to Economics2 subtopics

2. Microeconomics12 subtopics

3. Macroeconomics7 subtopics

4. The Global Economy10 subtopics

Unrealistic Assumptions

Factors of production are fixed

Technology is fixed

Perfect Mobility within a country

Full employment of all resources

anim nostrud sit dolore minim proident quis fugiat velit et eiusmod nulla quis nulla mollit dolor sunt culpa aliqua

Duis aute irure dolor in reprehenderit

Excepteur sint occaecat cupidatat non proident

Unlock the rest of this chapter with a free account

Unrealistic Assumptions

Factors of production are fixed

Technology is fixed

Perfect Mobility within a country

Full employment of all resources

anim nostrud sit dolore minim proident quis fugiat velit et eiusmod nulla quis nulla mollit dolor sunt culpa aliqua

Duis aute irure dolor in reprehenderit

Excepteur sint occaecat cupidatat non proident

Unlock the rest of this chapter with a free account