Theory question 105
International Trade(a) Define tariff.
(b) State the following laws: (i) The law of absolute cost advantage; (ii) The law of comparative cost advantage.
(c) Outline any four assumptions behind the law of comparative cost advantage.
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(a) A tariff is a tax imposed on imported (or exported) goods.
(b)(i) Absolute advantage: a country should specialise in producing goods it can produce more efficiently (at lower absolute cost) than other countries, and trade for others.
(ii) Comparative advantage: even if a country is more efficient in all goods, both countries gain if each specialises in the good in which it has the greater relative advantage (lowest opportunity cost).
(c) Any four: two countries and two goods; no transport costs; free trade (no barriers); perfect mobility of factors within a country but immobility between countries; constant costs/returns; full employment; perfect competition; labour is the only factor (labour theory of value).
Comparative advantage is based on opportunity cost.