4.1.2 Specialisation and trade

• What is absolute trade?

  A country can produce more of one product than another country can with the same amount of resources
• What is comparative advantage?

  A country can produce a good with a lower opportunity cost than that of another country
• What are the laws of comparative advantage?

  • Constant returns to scale 
  • No transport costs
  • No trade barriers 
  • Perfect mobility of factors of production  between different uses
  • Externalities are ignored
• What are the limitations of the laws of comparative advantage?

  • Free trade is not fair trade
  • Based on unrealistic assumptions 
  • If the opportunity cost were the same there would be no benefit from specialisation and trade
• What are advantages of specialisation of trade?

  • Higher living standards and increased employment would result in an increase in world output
  • Lower prices therefore higher consumer surplus and increased choice
  • There is a transfer of management expertise and technology
  • There are economies of scale 
  • There is a reduction in the power of domestic monopolies
• What are disadvantages of specialisation of trade?

  • There is a deficit on the trade in goods and services balance of they are uncompetitive
  • Danger of dumping
  • Increased unemployment in some countries 
  • Increased risk of contagion and disruption 
  • TNCs may become global monopolies and exploit consumers
  • Could be unbalanced development
• When does a country have an absolute advantage?

  If a country using the same factors of production can produce more a product
• What is the opportunity cost in terms of comparative advantage?

  The sacrifice of alternative products made when you specialise in another
• What is international specialisation?

  Where countries or regions focus on producing and exporting specific goods or services in which they have a comparative advantage (lower opportunity cost), while importing other goods and services that they can acquire more efficiently from trading partners
• What does international specialisation allow?

  • Allows countries to allocate their scare factor resources more efficiently
  • Improve overall productivity
  • Benefit from the gain of trade across borders
• What factors affect the comparative advantage?

  • Quantity and quality of natural resources available
  • Demographics 
  • Factors such as an ageing population, net migration, levels of women’s participation in the labour force
  • Rates of capital investment including infrastructure spending
  • Investment in research which can drive business innovation
  • Fluctuations in the exchange rate which then affect prices of both exports and imports
  • Import controls such as import tariffs, export subsidies and quotas used to create an artificial comparative advantage
  • Non-price competitiveness of producers
• What are the risks of trade from international specialisation?

  • Transport costs such as carbon emissions from increased food miles
  • Negative externalities from both production and consumption
  • Risk of rising structural unemployment as trade patterns change
  • Inequality - the benefits from globalisation are often unequally shared
  • Pressure on real wages and jobs in many high wage countries
  • Vulnerability to global shock such as COVID-19
• What is allocative efficiency?

  Resources are allocated in a way that maximises consumer satisfaction
• What does allocative efficiency do?

  Produces the right mix of goods and services to meet consumer demand
• What is the impact of allocative efficiency?

  • Competition from lower-cost import sources drives market prices down closer to marginal cost. 
  • Lower prices reduce the level of monopoly profits and increase real incomes
• What is productive efficiency?

  Produce a good or service at the lowest possible cost using the minimum amount of inputs
• What is the impact of productive efficiency?

  Specialising and selling in larger markets encourages increasing returns to scale (internal economies of scale) leading to a lower long run average cost of production
• What is dynamic efficiency?

  Ability of an economy to innovate and adapt to changing circumstances
• What does dynamic efficiency involve?

  The development of new technology and new process that improve productivity and efficiency over time
• What is the impact of dynamic efficiency?

  Economies that are open to trade may see growing numbers of innovative businesses who invest more in research and development and in the human capital of their workforce which can help raise labour productivity
• What is X-inefficiency?

  When a firm operates at a higher cost than it could if it were more efficient
• Why does X-inefficiency often rise?

  Due to factors such as managerial incompetence, lack of competition or government regulation
• What is the impact of X-inefficiency?

  Intense competition in markets provides a discipline for businesses to keep their operating costs under control and reduce waste to remain price competitive and profitable