The theory proves trade can raise output. Its assumptions often fail.
Assumptions that fail in the real world
No transport costs
Shipping goods far can wipe out the gain.
Free trade
Tariffs raise the price of what a country imports.
Resources move easily
Coffee workers cannot switch to making palm oil overnight: structural unemployment.
Constant costs
Costs rise as a country makes more; land and forests run out.
The points to remember
- Write it like this: "The theory assumes no transport costs and mobile resources; in reality …"
- Name the assumption, then say what happens when it fails.
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Specialising in one good, often a primary product, carries risks.
The risks of specialising
Prices swing
Primary products have inelastic demand and supply: big price swings.
All eggs in one basket
Zambia relies on copper for about 70% of its export earnings.
Stuck in low-value goods
Low income elasticity: demand grows slowly as the world gets richer.
A theory for the rich?
New industries cannot grow up behind free trade.
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Paper 1 asked this in May 2022, as part (a) for 10 marks.
Explain two limitations of specialising according to the theory of comparative advantage.
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How the 10 marks are given
| Marks | What your answer needs |
|---|---|
| 9–10 | Theory fully explained, terms used correctly all the way through, the diagram included and fully explained |
| 7–8 | Theory explained, terms mostly right, the diagram included and explained |
| 5–6 | Theory partly explained, some terms, the diagram included |
| 1–4 | Theory only described or stated; few relevant terms |