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State THREE assumptions underlying the Law of Comparative Advantage - Leaving Cert Economics - Question 2 - 2007
Question 2
State THREE assumptions underlying the Law of Comparative Advantage. (i) (ii) (iii)
Worked Solution & Example Answer:State THREE assumptions underlying the Law of Comparative Advantage - Leaving Cert Economics - Question 2 - 2007
Step 1
Assumption (i): Transport costs do not exist.
Answer
One key assumption of the Law of Comparative Advantage is that transport costs do not exist. This means that goods can be traded freely between countries without any additional costs incurred for shipping, making the economic models simpler and more applicable.
Step 2
Assumption (ii): The law of diminishing marginal returns (LMR) does not apply.
Answer
Another assumption is that the law of diminishing marginal returns does not apply. This implies that as production increases, the additional output gained from an extra unit of input remains constant, allowing for a more straightforward analysis of production capabilities across different countries.
Step 3
Assumption (iii): Free trade takes place.
Answer
The final assumption is that free trade takes place. This means that there are no tariffs, quotas, or restrictions on international trade, allowing nations to specialize in the production of goods where they have a comparative advantage without facing trade barriers.