4.1.2 - Specialisation

Question 1

trading internationally

Answer 1

international trade decreases prices and increases the variety of goods/services available to a nation.
leads to a higher standard of living.

Question 2

what is international trade

Answer 2

exchange of goods/services between countries

Question 3

what is free trade

Answer 3

when there are no restrictions on the flow of goods/services between countries.

there is no government intervention

e.g. EU is a free trade area

Question 4

what is absolute advantage

Answer 4

when a country can produce a good/service using fewer resources than that of another country.

Question 5

David Ricardo’s theory (1817)

Answer 5

it was possible for a country not to have an absolute advantage in the production of a good, but through specialisation could gain from international trade if they had a lower opportunity cost.

by specialising, the volume of production increases.
excess production can be exported.
goods/services which aren’t produced in the country can be imported.

Question 6

comparative advantage

Answer 6

when a country can produce a good at a lower opportunity cost than that of another.

Question 7

comparative advantage diagram

Answer 7

it’s a PPF of both countries.

gradient of lime shows size of opportunity cost.

Question 8

assumptions of comparative advantage

Answer 8

1. No transport costs (could lower CA)
2. Costs are constant and there is no economies of scale (which helps increase gains of specialisation).
3. Goods are homogenous (unrealistic). Makes it difficult to conclude a country has CA as products are slightly differentiated and can’t be perfectly compared.
4. Factors of production are perfectly mobile​ ( no tariffs, no trade barriers, there is perfect knowledge).
5. Whether or not trade takes place depends on TOT between the countries.

Question 9

specialisation

Answer 9

Specialisation increases output as economic units become more productive and efficient:

1. Workers and firms develop greater skill and knowledge in specific production tasks.
2. Each economic unit focuses on activities where it has the greatest efficiency or comparative advantage.
3. Time is used more efficiently as there is no loss from switching between different tasks.
4. Capital equipment is used more effectively, creating technical economies of scale.

The higher output generated through specialisation can be exchanged for goods and services that the economic unit cannot produce efficiently.
Specialisation therefore enables trade and the exchange of goods and services between economic units.

Question 10

advantages of specialisation

Answer 10

1. CA allows countries to specialise in goods with lower opportunity cost, increasing world output and global economic growth.
2. Specialisation + trade enable EOS, lowering AC of production and reducing global prices.
3. Differences in factor endowments mean specialisation allows countries to use their FOP efficiently and access goods they cannot produce themselves.
4. Trade increases the range + variety of goods available to consumers, improving consumer welfare.
5. Greater international competition from trade incentivises innovation, leading to new products, improved production methods, lower costs, and higher consumer welfare.
6. Countries that isolate themselves from trade and specialisation tend to experience economic stagnation and lower economic growth.
7. Specialisation expands export industries, increasing employment and raising AD.

Question 11

disadvantages of specialisation

Answer 11

1. Over-dependence on specialisation can make countries vulnerable to shocks, such as price falls in key exports or disruption of essential imports for political reasons.
2. Specialisation can cause structural unemployment as domestic industries lose competitiveness to more efficient foreign producers, particularly where labour mobility is low, leading to long-term unemployment.
3. Increased specialisation and trade can damage the environment through higher transport emissions and greater exploitation of natural resources, such as deforestation.
4. Participation in international trade agreements and trading blocs can result in a loss of national sovereignty as countries must comply with shared rules and regulations.
5. Increased trade may lead to cultural erosion as foreign goods, services, and ideas replace domestic traditions and industries.