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LIMITATIONS OF COMPARATIVE ADVANTAGE - Coggle Diagram
LIMITATIONS OF COMPARATIVE ADVANTAGE
Assumed that there are equal sized economies
simplification to produce a clearer example
Full employment
if one or other countries has less than full employment of factors of production, then this excess capacity must usually be used up before the comparative advantage reasoning can be applied
Constant opportunity costs
specialisation of production can only be taken to the point at which the opportunity costs in the two countries become equal
Perfect mobility of factors of production within countries
necessary to allow production to be switched without cost
(in real economies this cost id incurred as capital will be tired up in plant and labour will need to be retrained and relocated)
Immobility of factors of production between countries
Negligible transport cost
frequently not the case in reality
Perfect competiton
a standard assumption that allows perfectly efficient allocation of productive resources in an idealised free market
in reality multinational oligopolies exist and countries operate protectionist policies
Economies of scale
no account is made of costs reducing as production increases
Homogenous products
assumes that the goods/services are identical, whereas they will not be in reality
Countries are likely to protect goods and services which they consider to have strategic value to their economy, and political considerations (trade embargoes)
lead to countries producing goods with high comparative costs
Time period
comparative advantage do not remain static and they may change over time
Fluctuating currency
comparative advantage might be eliminated by a movement in currency which could cause prices and costs to change