4.1.2 Specialisation And Trade Flashcards
Absolute advantage
When a country can produce a greater quantity of g/s using the same quantity of resources than another country
Comparative advantage
When a country can produce a g/s at a lower opportunity cost than another country
If the lines have the same gradient…
…there is no comparative advantage
If a country is producing 100,000 oranges and 50,000 smartphones. What is the opportunity cost of producing 1 smartphone?
To produce 1 smartphone, the country gives up 2 oranges. The opportunity cost is 2.
Assumptions and limitations comparative advantage
- 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
Pectecf
Assumptions and limitations comparative advantage (perfectly competitive market)
In reality, this is likely to be different, which results in the full benefit of specialisation not happening.
Assumptions and limitations comparative advantage (doesn’t consider exchange rates)
- 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
Assumptions and limitations comparative advantage (transport costs)
- 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
Assumptions and limitations comparative advantage (cost of production)
ignoring economies of scale and changing production costs)
Assumptions and limitations comparative advantage (factors of production)
It assumes that the factors of production can easily be switched from producing one good to producing another
Assumptions and limitations comparative advantage (countries develop advantage)
- 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 *
Assumptions and limitations comparative advantage (countries develop advantage) evaluation
Some countries might become stuck in the production of one good or service, so they cannot develop further
Advantages of specialisation and trade in an international context
- greater world output
- higher quality
- greater variety
- economies of scale
Advantages of specialisation and trade in an international context (greater world output)
• Greater world output, so there is a gain in economic welfare
• E.g trade creation diagram
• Higher economic growth and living standards
Advantages of specialisation and trade in an international context (greater world output) evaluation
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
Advantages of specialisation and trade in an international context (higher quality)
• There could potentially be higher quality, since production focuses on what people and businesses are best at
Advantages of specialisation and trade in an international context (greater variety of g/s)
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)
Disadvantages of specialisation and trade in an international context
- negative externalities
- increased economic integration
- structural unemployment
- monopolies
Disadvantages of specialisation and trade in an international context (neg externalities)
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.
Disadvantages of specialisation and trade in an international context (economic integration)
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.
Disadvantages of specialisation and trade in an international context (structural unemployment)
• 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.
Disadvantages of specialisation and trade in an international context (monopolies)
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.
Impact of increased tariff on steel from China
- increase production cost = expenditure switching effects (producers will go for cheaper UK substitues)
*
Evaluation of tariff
- depends on size of tariff (might not be enough to deter producers from buying it compared to substitutes)
