L2- Specialisation and trade

Question 1

factor endowments definition

Answer 1

the amount of land, labour, capital and entrepreneurship that a country possesses and can exploit for production

Question 2

3 main reasons countries trade with one another

Answer 2

• different factor endowments- oil in saudi
  -price
  -product differentiation

Question 3

specialisation definition

Answer 3

• occurs when an individual, firm, region, or country concentrates on the production of a limited range of goods and services
• increase in productivity as skill levels and scale of production rise - increase in quality and reduce prices

Question 4

how are trade and specialisation related?

Answer 4

-trade allows countries to specialise in producing the goods and services they can produce efficiently
- after specialisation, countries earn money to import things unavailable in their economy, through trade

Question 5

what assumptions does the theory of absolute advantage make?

Answer 5

• 2 countries in the world who each have an equal amount of resources
  -both countries are capable of producing 2 goods

Question 6

when does a country have absolute advantage

Answer 6

when it can produce the same amount of a good or service using less resources

Question 7

what is the principle of comparative advantage

Answer 7

• specialisation and trade can be mutually beneficial even if one country has an absolute advantage in producing both goods
  -makes same assumptions as principle of absolute advantage

Question 8

the principle of comparative advantage holds that countries should:

Answer 8

• specialise in the good which they have the lowest opportunity cost
  -trade with the other country to obtain the good they no longer produce

Question 9

what do we use trading possibility frontier for?

Answer 9

• theory of comparative advantage does not say how gains from specialisation will be distributed
• used to figure out potential mutually beneficial exchange rates

Question 10

autarky definition

Answer 10

economic independence or self suffciency

Question 10

assumptions of theory of comparative advantage (disadvantages)

Answer 10

• no transportation costs
  -perfect knowledge- all buyers and sellers know where cheapest goods can be found internationally
• factors of production are mobile (bananas to ariplanes)
  -cost of production is constant
  -no external costs in production (pollution)
  -no barriers to trade
• may make products uncompetitive

Question 11

advantages of specialisation and trade

Answer 11

• allows countries to focus on goods and services they have comparative advantage in (productivity, efficient allocation of resources, output, GDP)
• trade provides increased choice for consumers and producers
  -opens domestic producers to competition from abroad (pressure, competitive prices, high quality, innovation- consumers get lower price and higher quality)
  -trade provides larger market for firms- allows expansion to unobtainable size in one country ( economies of scale can be maximised, firms can undercut rivals, provide lower price)

Question 12

disadvantages of specialisation and trade

Answer 12

• specialisation can lead to an economy or region to have overdependence on a small number of industries - if region loses comparative advantage, outcompeted by rivals on price/quality (unemployment, gdp fall as domestic firms close)
  -vulnerable to geopolitical change (western rely on arab states for oil)
• if lose industry due to loss of comparative advantage- structural unemployment
  -developing countries- comparative advantage may be poor long term strategy, tend to have advantage in primary products- weak economic growth as value added is low (limit ability to diversify)