International Trade and Globalisation – Specialisation and Free Trade
Learning Objective
Explain why countries specialise in the production of certain goods and how this leads to a more efficient allocation of resources and lower‑cost production.
1. Why Do Countries Specialise?
Scarcity of resources – each country has a different mix of land, labour, capital and technology.
Opportunity cost – producing one good means giving up the production of another.
Comparative advantage – a country should produce the goods for which it has the lowest opportunity cost.
Economies of scale – larger output can reduce average costs.
Consumer demand – specialisation allows a wider variety of goods to be available at lower prices.
2. Opportunity Cost and Comparative Advantage
Opportunity cost (OC) of a good is the amount of another good that must be forgone to produce one unit of the first good:
\$\$
OC_{A\;in\;Country\;X}= \frac{\text{Units of Good B forgone}}{\text{Units of Good A produced}}
\$\$
Example: Two Countries, Two Goods
Country
Units of Wheat per labour hour
Units of Cloth per labour hour
Country A
5
2
Country B
3
3
Calculate the opportunity costs:
Country A:
OC of 1 unit of Wheat = \$\frac{2}{5}=0.4\$ units of Cloth.
OC of 1 unit of Cloth = \$\frac{5}{2}=2.5\$ units of Wheat.
Country B:
OC of 1 unit of Wheat = \$\frac{3}{3}=1\$ unit of Cloth.
OC of 1 unit of Cloth = \$\frac{3}{3}=1\$ unit of Wheat.
Since Country A gives up fewer units of Cloth to produce Wheat, it has a comparative advantage in Wheat. Country B has a comparative advantage in Cloth.
3. Gains from Trade
When each country specialises according to comparative advantage and then trades, both can consume beyond their own production possibility frontiers (PPFs).
Suggested diagram: Two PPFs showing the points of specialization and the trade line that allows both countries to achieve higher consumption bundles.
Key points to remember:
Specialisation increases total output because resources are used where they are most productive.
Trade allows each country to obtain goods at a lower cost than if it produced them domestically.
The net benefit is the area between the pre‑trade consumption point and the post‑trade consumption point on the PPF diagram.
4. Factors Determining Comparative Advantage
Factor
How it influences comparative advantage
Resource endowments
Abundance of a factor (e.g., labour, capital, land) reduces the cost of goods that use that factor intensively.
Technology
More advanced production techniques lower unit costs for specific goods.
Scale economies
Large‑scale production spreads fixed costs, making the good cheaper to produce.
Government policy
Subsidies, tariffs, and regulations can alter relative costs.
Infrastructure
Better transport and communication reduce transaction costs.