4.1.2 - Specialisation and trade

Question 1

Define factor endowment

Answer 1

The amount of land, labour, capital, and entrepreneurship that a country possesses and can exploit for production.

Question 2

Define product differentiation

Answer 2

The process of distinguishing a product or service from others, to make it more attractive to a target market.

Question 3

What does an uneven distribution of resources lead to ?

Answer 3

Countries not being able to produce everything that they want

Question 4

What does trade provide ?

Answer 4

Trade provides a mutually beneficial method to obtain goods and services that are unavailable or in insufficient supply in an economy.

Question 5

What are the three main reasons that countries train with one another ?

Answer 5

Different factor endowments

Price

Product differentiation

Question 6

What is specialisation ?

Answer 6

Specialisation occurs when an individual, firm, region, or country concentrates on the production of a limited range of goods and services.

Question 7

What does specialisation lead to ?

Answer 7

Increases in productivity because skill levels and the scale of production rise.

Improvements in productivity allow firms to increase quality and reduce prices.

Question 8

How are trade and specialisation related ?

Answer 8

Trade allows countries to specialise in producing the goods and services they can produce efficiently

Question 9

What are the assumptions surrounding absolute advantage ?

Answer 9

There are two countries in the world who each have an equal amount of resources.

Both countries are capable of producing two goods.

Question 10

When is a country said to have absolute advantage ?

Answer 10

if it can produce more of a good, using equal amounts of resources than another country.

Question 11

What do we use to determine absolute and comparative advantages ?

Answer 11

We use labour costs instead of output

Question 12

What is the theory of comparative advantage ?

Answer 12

The theory of comparative advantage holds that specialisation and trade can be mutually beneficial even if one country has an absolute advantage in producing both goods.

Question 13

Which country is said to have a comparative advantage ?

Answer 13

The country that has the lowest opportunity cost for a good has a comparative advantage in producing that good.

Question 14

What does the principle of comparative advantage hold ?

Answer 14

It holds that countries should :

• Specialise in the good which they have the lowest (relative) opportunity cost
• Trade with other countries to obtain the goods that they do not specialise in

Question 15

If a country specialises in the good they have a comparative advantage what can they expect ?

Answer 15

It is reasonable to expect output to increase over time.

Question 16

Define autarky

Answer 16

Economic independence or self-sufficiency

Question 17

What is a trading possibility frontier ?

Answer 17

A trading possibility frontier shows exchange rates which allow mutually beneficial trade to take place.

Question 18

What are the assumptions of the theory of comparative advantage ?

Answer 18

-There are no transportation costs.
- There is symmetrical information, so that all buyers and sellers know where the cheapest goods can be found internationally
- The factors of production are perfectly mobile. This means they can be easily switched from producing one good to another
- The cost of production is constant.
- There are no external costs in production
- No pollution is created by firms or if there is it is internalised, leading to no external costs to third parties
- There are no barriers to trade.

Question 19

What are the advantages of specialisation and trade ?

Answer 19

• Allows countries to focus on goods and services which they have a comparative advantage in
• Trade gives consumers access to a wider range of goods and services.
• Trade opens domestic producers up to competition from abroad. The pressure to maintain competitive prices, high quality, and innovate increases as a result.
• Trade provides a larger market for firms. This gives them the chance to expand to a size that would be unachievable in one country.

Question 20

What are the disadvantages of specialisation and trade ?

Answer 20

• Specialisation can lead to an economy or region depending heavily on a small number of industries in some cases, a region may become dependent on a single industry.
• Trade and specialisation can leave countries vulnerable to geopolitical change.
• If a country loses an industry due to a loss of comparative advantage, structural unemployment is likely to follow (without government intervention)
• For developing countries, strict adherence to the principle of comparative advantage may be a poor long term development strategy.

Question 21

Define primary product

Answer 21

Goods that are available from cultivating raw materials without a manufacturing process.

Question 22

What are the limitations of the comparative advantage model ?

Answer 22

• There is not always perfect knowledge
• Assumes there are no transport costs
• Assumes that there are no economies of scale
• Rates of inflation are ignored
• Assumes that there are no import controls
• Non price competitiveness is ignored
• Exchange rate movements are ignored
• R&D investment is ignored