4.1.2 Specialisation and trade

Question 1

International trade

Answer 1

The exchange of goods and services between countries

Question 2

Benefits of international trade

Answer 2

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.

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.

Question 3

Why do countries specialise?

Answer 3

• They have the resources to produce the good or service efficiently.
• They’re better than other countries at producing the good or service.

Question 4

Advantages of specialisation (in international trade)

Answer 4

 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.

Question 5

Disadvantages of specialisation (in international trade)

Answer 5

• 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.

Question 6

Disadvantages of specialisation

Answer 6

• 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).

Question 7

Absolute advantage

Answer 7

Inherent ability of a country to produce specific goods in efficient manner at lower marginal cost in comparison to any other country.

A country will have an absolute advantage when its output of a product is greater per unit of resource used than any other country.

Question 8

Example - Absolute advantage

Answer 8

Question 9

Comparative advantage

Answer 9

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.

Question 10

The law on comparative advantage is based on several assumptions, which make it hard to apply to the real world.

What are these assumptions?

Answer 10

• No economies or diseconomies of scale.
• No transport costs
• No barriers to trade
• Factors of production are mobile.
• No externalities

Question 11

How can specialisation and trade affect the Macro PPFs?

Answer 11

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.

Question 12

Comparative advantage diagram

Answer 12

Question 13

The importance of trade for developed countries

Answer 13

• 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.

Question 14

The importance of trade for developing countries

Answer 14

• 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.