4.1.2 Specialisation and trade

• Specialisation


  Countries can specialise in the production of certain goods
• Trade


  Countries trade to get the goods and services they are unable to produce
• Absolute advantage


  A country has absolute advantage in the production of a good or service if it can produce it using fewer resources and at a lower cost than another country
• Comparative advantage


  Occurs when a country can produce a good or service at a lower opportunity cost than another country
• Opportunity cost


  The opportunity cost of production is reflected in the gradient of the PPF. If more of one good is produced, less of the other good can be produced
• The theory of comparative advantages assumes a perfectly competitive market
• In reality, the market is likely to be different, which results in the full benefit of specialisation not happening
• Specialising fully could also lead to structural unemployment, since workers might not gain the transferable skills they need to change between sectors, or they are simply unable to change
• Comparative advantage does not consider the exchange rate when considering the cost of production for both countries
• Comparative advantage is derived from a simple model with two countries, but the global trade market is significantly more complex than this
• It can be argued that comparative advantage is no longer a relevant concept, as countries do not only produce a handful of goods and services, and there is very little specialisation
• Advantages of specialisation and trade in an international context

  • Greater world output, so there is a gain in economic welfare
  • There could potentially be higher quality, since production focusses on what people and businesses are best at
  • A greater variety of goods and services could be produced
  • Lower average costs, since the market becomes more competitive
  • There is an increased supply of goods to choose from
  • There is an outward shift in the PPF curve
  • More opportunities for economies of scale
• Disadvantages of specialisation and trade in an international context

  • Less developed countries might use up their non-renewable resources too quickly, so they might run out
  • Countries could become over-dependent on the export of one commodity, such as wheat. If there are poor weather conditions, or the price falls, then the economy would suffer
  • There could be more structural unemployment, since production moves abroad
  • Some countries might become stuck in the production of one good or service, so they cannot develop further