Specialisation and Trade Flashcards
What is Factor Endowment
The amount of land, labour, capital and entrepreneurship that a country possesses and can exploit for production
Define Mutually
Felt or done by two or more people or groups in the same way
Define Product Differentiation
The process of distinguishing a product or service form others, to make it more attractive to a target market
Define Copious
Abundant in supply or quantity
What type of method does trade provide
A mutually beneficial method to obtain goods and services that are unavailable or in insufficient supply in an economy
What are the main reasons countries trade with one another
Different factor endowments
Price
Product differentiation
Define specialisation
Occurs when an individual, firm, region or county concentres on the production of a limited range of goods and services
What does the UK specialise in
Finance, Law and Pharmaceuticals
How are trade and specialisation related
Trade allows countries to specialise in producing the goods and services they can produce efficiently
What happens after specialisation through trade
Countries can earn money to import goods and services unavailable in their economy
What assumptions does the theory of absolute advantage make
There are two countries in the world who each have an equal amount of resources
Both countries are capable of producing two goods
When is a country said to have an absolute advantage
If it can produce more of a good using equal amounts of resources than another country
What can we use instead of output to determine absolute and comparative advantage
Labour costs
The country with the most efficient labour has the absolute advantage
What is the theory of comparative advantage
Specialisation and trade can be mutually beneficial even if one country has an absolute advantage in producing both goods
How to determine whether a country has a comparative advantage
Determine the opportunity cost of producing each good
Which country has a comparative advantage out of two countries
The one with the lowest opportunity cost
What does the principle of comparative advantage hold
Specialise in the good which they have the lowest relative opportunity cost
Trade with the other country to obtain the good they no longer produce
What is reasonable to expect for a country that specialises in a good they have a comparative advantage in
For output to increase over time
What doesn’t the theory of comparative advantage say
How the gains from specialisation will be distributed
What do we use trading possibility frontiers for
To figure out potential mutually beneficial exchange rates
Define Autarky
Economic independence or self sufficiency
Define Forgo
To go without something desirable
What does a TPF show
Exchange rates which allow mutually beneficial trade to take place
What are exchange rates based on in the theory of comparative advantage
The two goods involved
When does it make sense to trade with other countries
If the exchange rate is higher
Assumptions to the theory of comparative advantage
No transportation costs
There is perfect knowledge
FOP are perfectly mobile
Cost of producing an extra good is a constant
There are no external costs in production
There are no barriers to trade
No significant externalities
What is present in most forms of production
Externalities
Advantages of Specialisation and Trade
Allows countries to focus on goods and services which they have a comparative advantage - improved productivity - more efficient allocation of resources - GDP rises
Consumers access to a wider range of goods and services - products benefit from improved choice
Trade opens domestic producers up to competition from abroad - pressure to maintain competitive prices, high quality and innovations - Consumers can benefit from lower prices and higher quality
Larger market for firms - chance to expand to a size unattainable in one country - allows economies of scale to be maximised so cost is reduced - firms can undercut rivals and provide lower prices to consumers
Define primary product
Goods that are available from cultivating raw materials without a manufacturing process
Disadvantages of specialisation of trade
Can lead to an economy ore region depending heavily on a small number of industries
Can leave countries vulnerable to geopolitical change
If a country loses an industry due to a loss of comparative advantage - structural unemployment is likely to follow
For developing countries - strict adherence to the principle of comparative advantage may be a poor long term development strategy- tend to have comparative advantage in primary produce - weak economic growth because value added is usually low - limits their ability to diversify
