Revision:Specialisation and Trade

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Specialisation is when a factor of production is devoted to a specific job. This applies to all factors of production - land, labour, capital and enterprise. By specialising and trading, countries can increase overall output.

Absolute and comparative advantage

When a country can produce more of a product per unit resource than its rivals can, it has absolute advantage. The country can produce at a lower factor cost.

More important, however, is Ricardo's idea of comparative advantage. The producer with the lowest opportunity cost of production for a particular product has comparative advantage. For example, Portugal can produce more wine and cloth than England per unit resource (it has absolute advantage in both). Compared with Portugal, England is bad at producing cloth, but terrible at producing wine. Therefore England should specialise in cloth and Portugal in wine, because the opportunity cost of Portugal producing extra cloth is greater than producing extra wine.

The Gains from Trade

The most important gain from trade is increased output. This can lead to increased living standards, greater variety of goods and spread of technology. Other gains include:

• Economies of scale
• Political links may prevent wars
• Competition gives greater efficiency and reduces the power of the monopoly producer

Division of labour

Division of labour is a special type of specialisation. The production of a good is spilt into many tasks which can be undertaken by different people. There are three types of division of labour:

1. Specialisation of people in trades or professions (e.g. milkmen)
2. Specialisation by process (e.g. jam making)
3. Specialisation by area (e.g. Silicon Fen, Cambridge)

Advantages

1. Time saving
2. Increase in output due to productivity gains from increased economic organisation
3. Improvement in quality of goods because specialists can perform better
4. Makes the best use of natural abilities
5. Reduction in costs because people work faster
6. Automation as the use of machinery takes over repetitive tasks

Disadvantages

1. Mental disadvantages on workers of low job satisfaction
2. Strikes and absenteeism
3. Immobility of labour

Limits to the division of labour

• Some trades, such as handmade craft trades, are not suitable for specialisation.
• Large scale sales are needed for division of labour
• Management may not be efficient

Also See

Take a look at the other unit 1 A level economics revision notes:

• The Economic Problem (AQA, Edex, OCR, WJEC)
• Factors of production (AQA, OCR)
• Positive and normative economics (AQA)
• Specialisation and Trade (AQA, Edex, OCR, WJEC)
• Producer and consumer surplus (AQA, Edex, OCR, WJEC)
• Demand theory (AQA, Edex, OCR, WJEC)
• Supply theory (AQA, Edex, OCR, WJEC)
• Supply and Demand Equilibrium (AQA, Edex, OCR, WJEC)
• Elasticity of demand (AQA, Edex, OCR, WJEC)
• Elasticity of supply (AQA, Edex, OCR, WJEC)
• The Price Mechanism (AQA, Edex)
• Indirect Taxes and Subsidies (Edex)
• The labour market (Edex)
• Economies of scale (AQA)
• Allocative efficiency (OCR)

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