LS2- Specialisation and Trade

Question 1

Specialisation

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

What are the main reasons countries trade with one another?

Answer 2

• different factor endowments (levels of FoP)
• price (cheaper)
• product differentiation

Question 3

When does a country have absolute advantage?

Answer 3

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

Question 4

When does a country have comparative advantage?

Answer 4

• when it has the lowest opportunity cost for a good in producing that good compared to another country

Question 5

Autarky

Answer 5

• economic independence or self-sufficiency

Question 6

Advantages of specialisation and trade

Answer 6

• allows countries to focus on goods and services which they have a comparative advantage in
• consumers have more choice, producers also benefit from wider choice (of raw materials)
• opens domestic producers up to competition from abroad -> they maintain competitive prices, high quality, innovation- beneficial for consumers
• larger market for firms- enables expansion to a size unachievable in one country

Question 7

Disadvantages of specialisation and trade

Answer 7

• can lead to an economy/region being overly dependent 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 because value added is usually low for primary products, limits country’s ability to diversify its economy