2.1 Specialisation and Trade

• What is the division of labour?

  It is where the production process is broken down into stages and workers are assigned different tasks.
• What are the two tasks involved in building houses mentioned in the study material?

  • Window fitting
  • Bricklaying
• What is division of labour?

  Division of labour is where the production process is broken down into stages and workers are assigned different tasks.
• What is specialisation?

  Specialisation is where an individual worker, firm, region or country produces a limited range of goods or services.
• What is barter?

  Barter is the trade/exchange of goods or services, for other goods or services, without using a medium of exchange (such as money).
• What is the role of money as a medium of exchange?

  Money is accepted in return for provision of goods and services, and helps avoid the inefficiencies of a barter system, such as the "double coincidence of wants" problem.
• How does division of labour and specialisation affect output?

  • Division of labour: Breaking down the production process into separate tasks and assigning workers to different tasks
  • Specialisation: Workers allocating all their time to one specific task
  • Effect on output:
  • Increased efficiency and productivity
  • Higher total output per month
  • Potential disadvantages: Boredom, loss of range of skills, over-reliance on specialist workers
• What are the advantages and disadvantages of division of labour and specialisation?

  Advantages:

  • Reduced movement between tasks, saves time, increases efficiency
  • Repetition increases skill, more productive (higher productivity)
  • Tasks broken down, becomes more efficient to use specialist workers and machinery

  
  

  Disadvantages:

  • Same task, leads to boredom, may lead to reduced productivity
  • Loss of range of skills
  • Strikes/breakdown of specialist machinery can lead to all production being completely stopped
  • More dependent in production of specialist workers (which may be in short supply)
• What is the "double coincidence of wants" problem in a barter system?

  For barter to occur, there needs to be a specific direct double coincidence of wants of the two trading parties.
• How does the use of money as a medium of exchange help overcome the inefficiencies of a barter system?

  The use of money as a medium of exchange significantly increases the level of economic activity, as buyers and sellers are happy to exchange goods and services for money, helping to avoid the inefficiencies of a barter system, such as the "double coincidence of wants" problem.
• How can the concepts of opportunity cost and comparative advantage be used to explain the benefits of specialization and trade?

  • Opportunity cost: The cost of an activity measured in terms of the next best alternative foregone
  • Comparative advantage: A country has a comparative advantage in producing a good if it can produce that good at a lower opportunity cost than another country
  • Countries can benefit from specializing in the production of goods they have a comparative advantage in, and then trading with other countries
  • This allows countries to consume more of both goods than they could produce on their own, increasing overall economic welfare
• How can the production possibility curve (PPC) be used to illustrate the concept of comparative advantage?

  The PPC can be used to show the internal opportunity cost ratios for each country, which determines their comparative advantage. A country has a comparative advantage in producing the good with the lower opportunity cost.
• How do the trade possibility curves (TPCs) illustrate the benefits of specialization and trade between countries?

  The TPCs show that after specialization and trade, the output combinations available to the countries exceed their individual production possibilities without trade. This is because each country can now trade at a more favorable opportunity cost ratio than their internal production ratio.