Demands of the Question: Define the principles of comparative advantage, EXPLAIN and give examples of countries that have specialized. Explain the advantages of free trade in general. Do not evaluate.

Definition:

Comparative advantage exists when one country is able to produce a good more cheaply, in comparison to other goods produced domestically, than another country.

Comparative advantage is a principle of economics which states that trade between two countries will be mutually beneficial as long as their domestic opportunity costs of production differ.

• - Exists when goods produced cheaply
• - Trade is mutually beneficial
• - As long as domestic opportunity costs of production differ

Diagrams:

Example given that takes into account the economies of two countries, pre and post trade agreements:

Evaluation Suggestions:

• - Provide the limitations that befall specialization and comparative advantage.
• - Discuss and give examples of why countries would choose to specialize.
• - Is this effective only in the short term, or does it also apply in the long term?
• - Explain stakeholders and who are affected by the decision to specialize.