IGCSE Economics Notes / Specialisation and Free Trade

6.1.1 Specialisation by Country

Definition of Specialisation by Country

• this is the process by which individuals, firms and economies concentrate on producing those goods and services in which they have an advantage
• where it relates to the dividing up of production processes into a sequence of different tasks, it is known as division of labour
• it can also, however, refer to countries specialising in production where they have a comparative advantage

Basis for Specialisation by Country

• countries have different factor endowments
• they should specialise in producing the products they are best at making / those which make the best use of these endowments
• benefits from economies of scale can be obtained so costs and prices can be lower
• world output will increase because of the greater efficiency of production
• standards of living will rise
• Countries specialise to make the most efficient use of resources and produce at lower opportunity cost

Advantages of Specialisation

• make better use of available resources / factor endowments
• increase in output
• higher standards of living
• take advantage of a lower opportunity cost ratio in production
• increased efficiency
• Specialisation leads to increase in efficiency, increased competitiveness as the economy focuses on what they do best, they will be able to produce more and at a better quality, lower cost
• Specialisation enables workers to become highly trained / skilled and increase their productivity leading to higher incomes and demand for their labour
• Specialisation could help the economy achieve economies of scale where long-run average cost falls as output increases
• Specialisation enables countries to trade more with other countries
• increased export earnings can enable countries to afford more imports as well leading to increased choices, higher standards of living
• As output increases and trade increases, governments receive more tax revenue

Disadvantages of Specialisation

• Specialisation could lead to overdependence on a specific industry / danger of over-specialisation
• if this industry fails e.g. fall in demand, the whole economy could be adversely affected
• Specialisation makes it difficult for workers to retrain to other industries
• danger of structural unemployment
• Specialisation might lead to diseconomies of scale where long run average costs increase as output increases
• Resources may become exhausted making industry unsustainable
• a country can be vulnerable if it has to rely on imports to meet its needs
• there may be a decline in supply due to bad weather in exporting countries
• less efficient industries will collapse leading to an increase in unemployment
• a country can be vulnerable to changes in world economic conditions
• may be harmed by a world recession
• a country can be vulnerable to volatility in exchange rate movements
• exports may be reduced by a rise in the exchange rate

6.1.2 Free Trade

Definition of Free Trade

• international trade which is not restricted by import controls, such as tariffs, quotas or other methods of trade protection
• It allows world output to be increased when each country specialises in producing the goods and services they are best at producing / with the lowest opportunity cost
• It is encouraged by organisations such as the World Trade Organisation
• It can increase standards of living

Advantages of Free Trade

• Countries can specialise in what they do most efficiently
• It provides for a more efficient allocation of resources
• The world output of goods and services increases, raising standards of living
• Consumers gain from a greater choice
• they can benefit from consumption of goods not produced in their country / variations in products
• Consumers can gain from lower prices due to greater competition
• Firms can have greater choice of raw materials
• this will lower costs of production and improve the quality of products made

 Disadvantages of Free Trade

• domestic industries may face strong foreign competition
• less efficient firms may be driven out of the market
• unemployment may increase in industries that cannot compete
• countries may become overdependent on imports
• there may be vulnerability to global economic changes
• developing industries may need protection to grow (infant industry argument)