4.1.2 Specialisation And Trade

Question 1

Absolute advantage

Answer 1

When a country can produce a greater quantity of g/s using the same quantity of resources than another country

Question 2

Comparative advantage

Answer 2

When a country can produce a g/s at a lower opportunity cost than another country

Question 3

If the lines have the same gradient…

Answer 3

…there is no comparative advantage

Question 4

If a country is producing 100,000 oranges and 50,000 smartphones. What is the opportunity cost of producing 1 smartphone?

Answer 4

To produce 1 smartphone, the country gives up 2 oranges. The opportunity cost is 2.

Question 5

Assumptions and limitations comparative advantage

Answer 5

• perfectly competitive market
• exchange rates
• transport costs
• costs of production
• factors of production
• countries can start to develop an adv in production
• external costs of production
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Question 6

Assumptions and limitations comparative advantage (perfectly competitive market)

Answer 6

In reality, this is likely to be different, which results in the full benefit of specialisation not happening.

Question 7

Assumptions and limitations comparative advantage (doesn’t consider exchange rates)

Answer 7

• E.g one country might have a higher purchasing power party
• Therefore, if the price of one good increase, it might more worthwhile producing that good, even if the country has a comparative advantage in the other good

Question 8

Assumptions and limitations comparative advantage (transport costs)

Answer 8

• it assumes they are zero
• e.g country might have high transport costs so specialising might not be worthwhile if one country has high transportation costs

Question 9

Assumptions and limitations comparative advantage (cost of production)

Answer 9

ignoring economies of scale and changing production costs)

Question 10

Assumptions and limitations comparative advantage (factors of production)

Answer 10

It assumes that the factors of production can easily be switched from producing one good to producing another

Question 11

Assumptions and limitations comparative advantage (countries develop advantage)

Answer 11

• E.g Vietnam in the production of coffee. Their market share increased from 1% to 20%. It is the largest coffee supplier to the UK and, over the last 30 years, it has become one of the world’s largest coffee producers.
• Moreover, comparative advantage is only derived from a simple model with two countries however, the global trade market is significantly more complex than this *

Question 12

Assumptions and limitations comparative advantage (countries develop advantage) evaluation

Answer 12

Some countries might become stuck in the production of one good or service, so they cannot develop further

Question 13

Advantages of specialisation and trade in an international context

Answer 13

• greater world output
• higher quality
• greater variety
• economies of scale

Question 14

Advantages of specialisation and trade in an international context (greater world output)

Answer 14

• Greater world output, so there is a gain in economic welfare
• E.g trade creation diagram
• Higher economic growth and living standards

Question 15

Advantages of specialisation and trade in an international context (greater world output) evaluation

Answer 15

It can cause unbalanced development
- A deficit on the trade in g/s balance could arise if a country’s g/s are uncompetitive so not all countries can benefit
- International specialisation based on free trade = only those industries in which the country has a comparative advantage will be developed while others remain undeveloped; ie there will be a sectoral imbalance = restrict the overall rate of economic growth

Question 16

Advantages of specialisation and trade in an international context (higher quality)

Answer 16

• There could potentially be higher quality, since production focuses on what people and businesses are best at

Question 17

Advantages of specialisation and trade in an international context (greater variety of g/s)

Answer 17

A greater variety of goods and services could be produced
- This means lower prices (since markets are becoming more competitive) and more choice for consumers (since there is an increased supply of goods to choose from)

Question 18

Disadvantages of specialisation and trade in an international context

Answer 18

• negative externalities
• increased economic integration
• structural unemployment
• monopolies

Question 19

Disadvantages of specialisation and trade in an international context (neg externalities)

Answer 19

Potential negative externalities.
- Only specialising in one good can lead to the over use of a resource
- e.g LDCs might use up their non-renewable resources too quickly, so they might run out.

Question 20

Disadvantages of specialisation and trade in an international context (economic integration)

Answer 20

Increased economic integration = increased exposure to external shocks
- Countries could become over-dependent on the export of one commodity. E.g wheat. If there are poor weather conditions, or the price falls = economy would suffer.
- High levels of specialisation = possible diseconomies of scale. If an assembly line becomes highly specialised, production could be brought to a halt if there is a blockage in one area. It can be beneficial if there are more people specialised in different aspects.

Question 21

Disadvantages of specialisation and trade in an international context (structural unemployment)

Answer 21

• Factors of production sometimes can’t be easily switched from producing one good to producing another.
• 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.

Question 22

Disadvantages of specialisation and trade in an international context (monopolies)

Answer 22

can cause monopolies as global (transnational) companies become larger.
- Developing and emerging economies may face particular problems
- e.g infant industries may be unable to compete and go out of business; the monopsony power of global companies may mean that low prices are paid for commodities from developing countries.

Question 23

Impact of increased tariff on steel from China

Answer 23

• increase production cost = expenditure switching effects (producers will go for cheaper UK substitues)
  *

Question 24

Evaluation of tariff

Answer 24

• depends on size of tariff (might not be enough to deter producers from buying it compared to substitutes)