4.1.2 Specialisation and Trade

Question 1

Specialisation definition?

Answer 1

• When an individual, firm, region or country concentrates on the production of a limited range of goods and services

UK specialises in finance, law and pharmaceuticals (and more)

Question 2

Benefits of specialisation?

Answer 2

• Skill levels rise
• Scale of production rises
• Increased quality and reduced prices

Question 3

How are trade and specialisation related?

Answer 3

• Trade allows countries to specialise in producing the goods and services for which they have a comparative advantage in
• After specialisation, countries earn money to import goods/services unavailable

Question 4

What are the main reasons countries trade with one another?

Answer 4

• Different factor endowments
• Price (cheaper)
• Product differentiation

Question 5

When does a country have absolute advantage?

Answer 5

• If a country can produce more of a good, using equal amounts of resources, than another country

Question 6

When does a country have comparative advantage?

Answer 6

• When it can produce a good for a lower opportunity cost than other countries

Question 7

Autarky definition?

Answer 7

• Economic independence or self-sufficiency

Question 8

Trading possibility frontier?

Answer 8

• Shows exchange rates which allow mutually beneficial trade to take place

e.g. 1 car costs 2 bananas

Question 9

Assumptions of comparative advantage?

Answer 9

• No transportation costs
• Perfect knowledge such that all buyers and sellers know where the cheapest goods can be found
• Factors of production are perfectly mobile
• Cost of production is constant
• No external costs in production
• No barriers to trade

Question 10

Advantages of specialisation and trade?

Answer 10

• Allows countries to focus on goods and services which they have a comparative advantage in
• Consumers have wider range of goods and services to choose from - producers also benefit from wider choice
• Opens domestic producers up to competition from abroad - maintain competitive prices, high quality, innovation - beneficial for consumers
• Larger market for firms - allows them to expand to a size unachievable in one country

Question 11

Disadvantages of specialisation and trade?

Answer 11

• Can lead to an economy/region being overly dependant on a small number of industries - vulnerable to changes in comparative advantage
  => structural unemployment
• Vulnerable to geopolitical change
• Developing countries: specialisation in primary products likely to result in weak economic growth bc value added is usually low for primary products, limits country’s ability to diversify its economy