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Question 19M.3.HL.TZ0.c

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Date May 2019 Marks available [Maximum mark: 2] Reference code 19M.3.HL.TZ0.c
Level HL Paper 3 Time zone TZ0
Command term Outline Question number c Adapted from N/A
c.
[Maximum mark: 2]
19M.3.HL.TZ0.c

Country X and Country Y are capable of producing both apples and bananas. Assume a two-country, two-product model.

Country Y has absolute advantage in the production of both apples and bananas, and comparative advantage in the production of bananas.

Outline one reason why it might not be in a country’s best interests to specialize according to the principle of comparative advantage.

[2]

Markscheme

Reasons may include:

  • unemployment in industries where trading partners enjoy comparative advantage because workers are unable to move to those industries where there is a comparative advantage
  • over-specialization resulting in vulnerability to changes in market conditions or as a barrier to economic development
  • risk will be reduced by the avoidance of over-reliance on trading partners for essential products or resources which might compromise national security or diminish negotiating power
  • specialization may make it difficult for the economy to diversify, thus maintaining the risk of vulnerability to market conditions
  • safety and environmental standards may be compromised by low-quality imports
  • specialization may not result in beneficial trade if export markets are protected by barriers to trade
  • if demand conditions for the export good suffer a long-term decrease then the resulting deterioration of the country's terms of trade may harm the economy
  • over-specialization may result in an economy continuing to produce a good with low income elasticity of demand, causing economic growth to be slow relative to other economies.

Any other reasonable response should be rewarded.

Examiners report

Many candidates were able to explain a danger of over-specialization, while a minority focused on limitations of the model, such as transport costs or focus on a 2-country, 2-product model, which are limitations of the model rather than factors influencing the decision to specialize.

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