4.1.2 Specialisation and trade Flashcards
International trade
The exchange of goods and services between countries
Benefits of international trade
It can give countries access to resources and products they otherwise wouldn’t be able to use – countries can export goods in order to import the things they can’t produce themselves.
By trading internationally, a country’s consumers can enjoy a larger variety of goods and services.
Also, increased competition resulting from international trade can lead to lower prices and more product innovation– so people’s standards of living are raised by having more choice, and better quality and cheaper products.(improvement in allocative efficiency)
Additional markets (i.e. markets abroad) allow firms to exploit more economies of scale – if the additional markets mean there’s an increase in demand for their products.
International trade can also expose firms to new ideas and skills – for example, an MNC might bring new manufacturing skills to a developing country.
Disadvantages of free trade
- Negative externalities including pollution. (shipping )
- Damaging for lower skilled workers (inequality) , trade can lead to less equal distribution of income, Benefits mainly go to countries where TNC headquarters are.
- Over-dependence : countries can become overdependent on foreign trade. Small countries in particular (E.g central African republic ) can become dependant on one or two exports so fall in demand can lead to a large fall in GDP. e.g CAR with coffee.
- Jobs : changes in demand can lead too unemployment e.g structural unemployment, for example uk manufacturing experienced serious decline due to competition from abroad. The less mobile the workforce the greater changes in demand due to trade will reduce output and employment over long periods of time.
Why do countries specialise?
- They have the resources to produce the good or service efficiently.
- They’re better than other countries at producing the good or service.
Advantages of specialisation (in international trade)
Costs are reduced, which can be passed on to consumers in the form of lower prices.
The world’s resources are used more efficiently.
Global output is increased and living standards are raised.
Disadvantages of specialisation (in international trade)
- Trading internationally usually involves higher transport costs.
- Currency exchanges when trading abroad can carry costs, potentially resulting in financial losses.
- There are other costs to firms that trade internationally, such as complying with other countries’ legal and technical requirements, translating legal documents and advertising material, and performing market research for overseas markets.
- International trade increases globalisation.
Disadvantages of specialisation
- Domestic industries may be forced to shut down because foreign firms are better at producing the goods or services provided by that industry.
- Specialisation could lead to overreliance on one industry – if something happened to negatively affect that industry, it would have a severe impact on the whole economy.
- Countries are vulnerable to cuts in the supply of goods that they don’t produce themselves.
- Specialisation can have negative impacts on a country’s economy. For example, if a country begins to specialise in a particular industry, other industries may decline, and workers from those industries may struggle to get work (as they might not have the relevant skills).
Absolute advantage
When an economy can produce more of a good/ service than another economy.
A country will have an absolute advantage when its output of a product is greater per unit of resource used than any other country.
Example - Absolute advantage
Comparative advantage
Refers to country’s capability of producing the specific good at a lower opportunity cost in comparison to any other country.
A country has a comparative advantage if the opportunity cost of its producing a good is lower than the opportunity cost for other countries.
The theory of comparative advantages states that a country should specialise in the good/service that it can produce at the lower opportunity cost.
- By specialising, the volume of production increases.
- Excess production can be exported.
- Goods/services which are not produced in the country can be imported.
The law on comparative advantage is based on several assumptions, which make it hard to apply to the real world.
What are these assumptions?
- No economies or diseconomies of scale. (constant returns to scale: average costs stays constant, no matter how many are produced) .
- No transport costs
- No barriers to trade
- Factors of production are perfectly mobile. (workers can move easily, without cost between producing 2 goods in the model)
- No externalities
- Only two economies producing two goods
- Traded goods are homogenous ( commodities bought purely for price reasons)
- Perfect knowledge
-no tariff or trade barriers
How can specialisation and trade affect the Macro PPFs?
Shows the maximum amounts of two goods/services that an economy can produce with a fixed level of resources.
By using specialisation and trade, countries can consume outside of their PPF.
Comparative advantage diagram
Factors that affect comparative advantage.
-natural resources.
- Import controls
- Infrastructure
- Non- price factors
- Exchange rates
- transport costs
The importance of trade for developed countries
- Imports are crucial to maintaining high standards of living in developed countries.
- Products will often be cheaper when bought from abroad – e.g. due to increased competition and cheaper labour in developing countries.
The importance of trade for developing countries
- Developing countries can import goods they don’t have the technology to produce themselves, which results in a higher standard of living.
- Trade also gives these countries access to new materials, meaning new industries will be created because they can produce new products. This will help to improve the economies of developing countries.
Opportunity cost equation
GIVE UP / GAIN
What do LEDC’S tend to export
Commodities. ( DRC with copper, cobalt and other rare earth metals)
what do MEDC’S tend to export
Technologically sophisticated manufacturing and services ( uk with financial services America with most advanced gpu/ AI CHIPS / SEMICONDUCTORS)
Gains from trade economic efficiency ( be careful quite micro)
- Allocative efficiency : Competition from Lower-cost import sources drives market prices down closer to the marginal cost (allocative level) . Lower prices reduce level of monopoly profits and increases real income.
- Productive efficiency: Specialising and selling in larger markets encourages increasing returns to scale.
- Dynamic efficiency: Economies that are open to trade see growing numbers of innovative business ideas and R&D.
