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Learn why countries specialise, the concept of comparative advantage, advantages and disadvantages of specialisation, and the gains from international trade.
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Specialisation and trade Learning Objectives: • To know why countries specialise in the production of certain goods and services. • To be able to distinguish between comparative and absolute advantage. • To understand the advantages and disadvantages of countries specialising in the production of goods and services to trade
Re-Cap Define Opportunity Cost. Can you show this using a diagram?
Re-Cap Who pioneered the theory of division of labour?
Re-Cap List as many advantages and disadvantages of the division of labour as you can. (It’s ok if they differ to ones we have discussed)
Why do countries trade? • To obtain goods and services not available domestically • Imports may be cheaper or of better quality • To increase choice • To exploit economies of scale • To spread risks
The gains from trade between nations International trade is beneficial when there are differences between countries in the relative costs of producing goods and services. If countries opt to specialise in the production of certain commodities and if they can achieve a much higher output as a result, there are potential gains in economic welfare if free trade can take place between countries. Task: Look up free trade in your text book
Discuss Which countries should produce what and why?
David Ricardo: The Theory of Comparative Advantage
What is comparative advantage? Comparative advantage is the ability to produce a good or service at a lower opportunity cost than other producers.
Comparative Advantage and the Gains from Specialisation and Trade • First introduced by David Ricardo in 1817, comparative advantage exists when a country has a ‘margin of superiority’ in the supply of a product i.e. the cost of production is lower. Ie they can do it better, and cheaper!
Comparative advantage and the gains from specialisation and trade • Countries will usually specialise in and export products, which use intensively the factors inputs, which they are most abundantly endowed. For example the Canadian economy which is rich in low cost land is able to exploit this by specializing in agricultural production.
Comparative advantage and the gains from specialisation and trade • China has focused their resources in exporting low-cost manufactured goods which take advantage of much lower labour costs. • This is now changing as China looks to move from a middle-income country by specializing in industries that use higher levels of knowledge and technology.
Comparative advantage and the gains from specialisation and trade • In highly developed countries, the comparative advantage is shifting towards specializing in producing and then exporting high-value and high-technology manufactured goods and high-knowledge services.
The track coach’s dilemma Two runners (A & W) are projected to place 1-2 in 400 meter hurdles, and 2-5 in the 400 meter dash Scoring is as follows: Place Points 1 7 2 5 3 4 4 3 5 2 6 1 Only one of the runners can run each race What should he do?
Figure it out A will be 1st in hurdles, 2nd in dash W will be 2nd in hurdles, 5th in dash Hurdles Place Points Dash Place Points Total Points A W 1 7 4 3 10 7 W A 1 2 5 12 Place Points 1 7 2 5 3 4 4 3 5 2
Absolute versus comparative advantage An individual producer has an absolute advantage in the production of a product if he has the ability to produce the good or service using fewer resources than other producers use. An individual producer has a comparative advantage in the production of a product if she has the ability to produce the good or service at a lower opportunity cost than other producers.
Example Output of X Output of Y Country A 180 90 Country B 200 150 In this example, country B has an absolute advantage in both products. Absolute advantage occurs when a country or region can create more of a product with the same factor inputs. But Country A has a comparative advantage in the production of good X. It is 9/10ths as efficient at producing good X but it is only 3/5ths as efficient at producing good Y. Comparative advantage exists when a country has lower opportunity cost, i.e., it gives up less of one product to obtain more of another product. In our example above, for country A, every extra unit of good Y produced involves an opportunity cost of 2 unit of good X. For country B, an additional unit of good Y involves a sacrifice of only 4.3 units of good X.
While watching, try and list as many advantages and disadvantages of countries specialising and exchanging as you can, we will share these at the end. http://study.com/academy/lesson/gains-from-trade-and-the-benefit-of-specialization.html Follow with the quiz
Conclusion With specialisation and trade both countries can gain from trade
Comparative advantage and trade flows The theory would suggest: • That countries specialise in what they are good at. • Export those goods and services • …and import all other goods and services
Task: • Read pages ??? Of your text book, and have a go at the two activities. OR FIND EXAM QUESTION Write down any key words you come across in the glossary in the back of your workbooks, for a clear definition look in the glossary in the back of your textbook, and try and write it in a way you understand/that’s easier for you to remember.
Now this all raises is a very interesting question, which is how any of this is possible. If there’s 6 billion people in the world, half are children, another 1 billion aren’t capable of participating in the global economy for whatever reason, then that’s 2 billion people who make up the global economy. They’re separated by distance, language, culture, history. But something gets them all to cooperate…
HOMEWORK RESEARCH ADAM SMITH’S THEORY – ‘THE INVISABLE HAND’ Create a 60 second news report on this theory. You will have to present this.
