Comparative Advantage | A-Level Economics Notes

These revision notes cover everything you need to know about Comparative Advantage for A-Level Economics. They're designed for students studying AQA A-Level Economics, Edexcel A-Level Economics, and Edexcel International A-Level Economics. Written by Jaisul Naik, UCL Economics graduate and A-Level Economics tutor since 2017.

What is absolute advantage?

Absolute advantage is when a country is able to produce a good or service at a lower cost.

What is comparative advantage?

Comparative advantage is when a country is able to produce a good or service at a lower opportunity cost.

How do you calculate opportunity cost?

Make a ratio for good A : good B.

Simplify the ratio in the form 1 to n.

Practice question 1

Practice question 2

Advantages of specialisation and free trade

1. due to globalisation, countries are encouraged to specialise in the goods and services where they have a comparative advantage.
2. countries will have a comparative advantage in the goods or services with the lowest opportunity cost to produce.
3. comparative advantage theory suggests that specialisation should lead to an increase in total output.
4. the diagram shows an example of country A and country B who are able to produce cars and bikes.
5. if each country produced at the half way point on their PPF, then country A would be able to make 50 bikes and 50 cars whilst country B would be able to make 45 bikes and 25 cars. The total world output would be 170 units.
6. however, if country A specialised fully in cars and country B specialised fully in bikes then the total world output would be 190.
7. then, each country would be open to trade.
8. if each country is capable of producing more output with its available factors of production, this can be illustrated with an increase in productive potential, and a right shift in LRAS.
9. overall specialisation would lead to an increase in total output.

What are some disadvantages or assumptions of comparative advantage theory?

1. transport costs may outweigh comparative advantage gains
2. model assumes constant returns to scale
3. increased specialisation may lead to diseconomies of scale
4. leads to over-dependence and vulnerability to external shocks
5. governments may impose protectionism

Summary questions

1. what is absolute advantage?
2. what is comparative advantage?
3. how do you calculate comparative advantage?
4. practice question 1
5. practice question 2
6. what are the advantages of specialisation and trade?
7. what are the disadvantages or assumptions of comparative advantage theory?

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