Specialisation & Trade Liberalisation (Cambridge (CIE) A Level Economics): Revision Note

What is specialisation?

• Specialisation is the process by which countries focus their productive resources on the goods and services in which they have a comparative advantage, trading surplus output with other nations

  • When countries specialise in goods where they have a comparative advantage, total world output increases

  • Specialisation allows countries to exploit economies of scale - concentrating production lowers average costs as output rises

  • Specialisation drives dynamic efficiency - competition in world markets incentivises firms to innovate and improve productivity

  • Countries gain access to a wider variety of goods than they could produce domestically, increasing consumer choice and welfare

Free trade (trade liberalisation)

• Trade liberalisation is the removal of barriers to international trade - such as tariffs, quotas and subsidies - allowing goods and services to flow freely between countries at world prices

• International trade refers to the exchange of goods and services between countries

  • Exports are goods and services sold to overseas buyers - goods leave the country and money flows in

  • Imports occur when foreign goods and services are bought by domestic households and firms - money leaves the country and goods enter

• International trade is 'free' when there is no government intervention (quotas, taxes etc.) to reduce or limit trade

• Greater choice: with access to a wider variety of goods and services, the standard of living improves

• Lower prices: with international competition prices fall, giving households the ability to buy more

• International cooperation: required for trade helps countries to build better relationships which leads to lower levels of hostility

• Flow of new ideas: innovative ideas and technology can be shared between countries

• Access to resources: output can increase and costs of production can fall with increased access to raw materials

• Increased efficiency: international competition allows the most efficient firms to emerge and this improves the use of global resources

• Economic growth: exports are a key component of the gross domestic product of many countries and an increase in exports can lead to economic growth

• Economic development: Increased output leads to lower levels of unemployment, which leads to higher incomes and a higher standard of living

The trading possibility curve

• The trading possibility curve shows the combinations of two goods a country can consume after specialising and trading - consumption possibilities that lie beyond its own PPF

Diagram analysis

• Without trade, the UK produces and consumes on its own PPF

  • It could choose point C (5 steel, 8 leather)

• Without trade, France produces and consumes on its own PPF

  • It could choose point C (6 steel, 8 leather)

• The trading possibility curve (red line) runs from (0 steel, 16 leather) to (16 steel, 0 leather), lying beyond both national PPFs

• The UK has a comparative advantage in steel (steeper PPF); France has a comparative advantage in leather (flatter PPF)

• If both countries specialise completely, the UK produces 16 steel and zero leather; France produces 16 leather and zero steel

  • Combined world output rises to 16 units of steel and 16 units of leather, more than either country could produce alone

• Both countries can now consume at point A (8 steel, 8 leather)

  • A combination neither could reach independently

  • The UK produces 16 million units of steel and exports 8 million to France; employment shifts towards steel production

  • France produces 16 million units of leather and exports 8 million to the UK; employment shifts towards leather production

• The gain from trade is the movement from B and C up to point A

  • Higher consumption of both goods for both countries