Countries often specialize and trade according to the theory of comparative advantage. Explain the limitations of this approach.

Using real-world examples, discuss the advantages and disadvantages for a country of being a member of a trading bloc. 

Marks should be allocated according to the paper 1 markbands for May 2022 forward, part A.

Answers may include:

• Terminology: comparative advantage
• Explanation: of any limitations, such as it may lead to excessive specialization, specialization according to comparative advantage may not allow necessary structural changes to occur in an economy, viewed as the “rich man’s theory” by poorer nations as it mostly benefits the MDCs/MNCs, unrealistic assumptions, e.g. immobile and fixed factors of production, fixed technology, free trade, an absence of transport costs
• Diagram: PPC diagram to illustrate comparative advantage.

Marks should be allocated according to the paper 1 markbands for May 2022 forward, part B.

Answers may include:

• Terminology: trading bloc
• Explanation: of possible advantages such as trade creation, access to markets and greater potential for economies of scale; free movement of labour and greater employment possibilities, stronger bargaining power in multilateral negotiations, greater political stability and cooperation
• Diagram: use of a PPC diagram, a tariff diagram or any other relevant diagram
• Synthesis (discuss): the potential disadvantages, if advantages discussed first, e.g. trade diversion, loss of sovereignty, challenge to multilateral trading negotiations; or a discussion of the potential advantages if the other way round; overall assessment
• Examples: real-world examples of countries that have become members of a trading bloc or left a trading bloc.

Examiners should be aware that candidates may take a different approach which, if appropriate, should be rewarded.

N.B. It should be noted that definitions, theory, and examples that have already been given in part (a), and then referred to in part (b), should be rewarded.

Candidates appeared to find question 3 a challenge judging by the relatively few candidates who chose to respond to it.

It was interesting to note, however, that whilst this question was unpopular, nevertheless some of the best responses seen were to this question. A significant number of candidates produced focused and precise answers, detailing the limitations of the theory of comparative advantage.

However, it was not uncommon for candidates to treat part (a) as a discussion of the merits of free trade. Alternatively, absolute advantage was explained, with no consideration of the concept of comparative advantage as asked by the question. Such candidates therefore struggled to provide the limitations of the theory of comparative advantage as asked.

Candidates were generally more able to effectively address part (b) of this question. There was usually a good understanding of trade blocs. The use of real-world examples in this question was often very effective, with good candidates demonstrating a very competent understanding of various trading arrangements. Most candidates opted to explain different types of trading arrangement under different levels of integration. Good responses were able to examine the impact of trade creation and trade diversion, amongst other impacts, on member countries. Less effective responses tended to opt for a discussion of the merits of free trade alone, without adequate reference to the context set by the question.