Advantages and disadvantages of specialisation
International Trade, Specialisation and Free Trade (Syllabus 6.1)
Learning objectives
- Define specialisation and free trade.
- Explain why countries choose to specialise – comparative advantage, opportunity cost, economies of scale and efficient use of scarce resources.
- Identify the separate advantages and disadvantages of specialisation and of free trade.
- Draw and interpret a two‑country Production Possibility Frontier (PPF) diagram that shows the gains from trade.
- Evaluate the arguments (AO3) – when the benefits outweigh the costs and when the opposite may be true.
1. What is specialisation?
Specialisation occurs when a country, firm or individual concentrates on producing a limited range of goods or services in which it has a comparative advantage – i.e. the lowest opportunity cost of production. It is a response to the basic economic problem of scarcity: by allocating scarce resources to the activities that use them most efficiently, overall output can be increased.
2. What is free trade?
Free trade is the policy of allowing goods and services to move across borders with no government‑imposed restrictions such as tariffs, quotas or subsidies. Under free trade, countries can import the goods they do not produce efficiently and export the goods in which they specialise.
Examples of free‑trade arrangements include:
- The World Trade Organization (WTO) – a global framework that promotes the reduction of trade barriers.
- Regional agreements such as the European Union single market, NAFTA (now USMCA), and the ASEAN Free Trade Area.
3. Why do countries choose to specialise?
- Comparative advantage & opportunity cost – a country produces the good for which it sacrifices the fewest alternative units.
- Efficient use of scarce resources – land, labour and capital are allocated to their most productive uses.
- Economies of scale – average costs fall as output rises, making the specialised product cheaper.
- Higher national income – gains from trade can be invested in health, education and infrastructure, raising living standards.
4. Diagram – Gains from trade (two‑country PPF)
How to draw the diagram
- Draw two axes (good X on the horizontal, good Y on the vertical) for each country.
- Sketch the PPF for each country (concave to the origin).
- Mark the autarky points where each country produces and consumes without trade (PC for Country A, QC for Country B).
- Identify the comparative‑advantage points: Country A moves to PA (produces only cloth), Country B moves to PB (produces only wheat).
- Draw the world‑price line (P) – a straight line with a slope equal to the world relative price of the two goods.
- Show the consumption points after trade (CA for Country A, CB for Country B) where the world‑price line intersects each PPF – these lie outside the original PPFs, illustrating the net gain from trade.
Interpretation questions
- Why does each country move to its comparative‑advantage point?
- How does the world‑price line determine the terms of trade?
- What does the shaded area between the PPF and the consumption point represent?
5. Advantages and disadvantages of specialisation
| Advantages | Disadvantages |
|---|---|
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6. Advantages and disadvantages of free trade
| Advantages | Disadvantages |
|---|---|
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7. Evaluation (AO3) – balanced arguments
| Specialisation – When benefits outweigh costs | Specialisation – When costs outweigh benefits |
|---|---|
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| Free trade – When benefits outweigh costs | Free trade – When costs outweigh benefits |
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8. Summary table – Advantages vs. Disadvantages (combined view)
| Advantages (Specialisation + Free Trade) | Disadvantages (Specialisation + Free Trade) |
|---|---|
| Higher productivity and output | Dependence on imports for non‑specialised goods |
| Lower unit costs → cheaper consumer prices | Exposure to world‑market price fluctuations |
| Greater variety of goods and services | Loss of domestic skills and industries |
| Economies of scale reduce average costs | Potential increase in income inequality |
| Higher national income and employment in specialised sectors | Environmental pressure from intensive production |
| Technology transfer and innovation | Reduced policy autonomy |
Globalisation & Trade Restrictions (Syllabus 6.2)
Learning objectives
- Define globalisation.
- Identify the main causes of globalisation.
- Explain the economic, social, environmental and migration consequences of globalisation.
- Define multinational companies (MNCs) and describe their role in the global economy.
- Identify the main types of trade restrictions and the reasons governments use them.
- Evaluate the arguments for and against trade restrictions.
1. Definition of globalisation
Globalisation is the increasing integration of world economies through the rapid flow of goods, services, capital, information and people across national borders.
2. Causes of globalisation
- Technological advances – cheaper transport, faster communications, the internet.
- Liberalisation of trade and investment – reduction of tariffs, creation of free‑trade agreements.
- Growth of multinational companies – seeking new markets, cheaper inputs and economies of scale.
- Policy convergence – similar regulatory standards, intellectual‑property regimes.
3. Consequences of globalisation
Economic
- Increased trade flows and foreign direct investment (FDI).
- Access to larger markets → potential for higher growth.
- Greater competition forces inefficient firms to exit.
- Pressure on wages in low‑skill sectors.
Social
- Spread of ideas, culture and lifestyles (cultural exchange).
- Improved standards of living in many developing countries.
- Risk of cultural homogenisation and loss of local traditions.
Environmental
- Higher resource use and carbon emissions from increased transport.
- Possibility of “pollution havens” where firms locate in countries with lax regulations.
- International cooperation can also promote environmental standards (e.g., Paris Agreement).
Migration
- Labour mobility – workers move to where wages are higher, creating brain‑drain for some countries and brain‑gain for others.
- Remittances become an important source of income for many developing economies.
- Migration can affect domestic labour markets, wage levels and social cohesion.
4. Multinational Companies (MNCs)
- Definition: Firms that own or control production facilities in more than one country.
- Roles:
- Channel capital, technology and managerial expertise across borders.
- Create jobs in host countries (direct employment, supply‑chain effects).
- Generate export earnings and foreign exchange for both home and host economies.
- Influence host‑country policies through lobbying and investment decisions.
- Examples: Toyota (Japan‑UK plant), Unilever (UK‑Netherlands consumer goods), Apple (US design, Chinese assembly).
- Advantages of MNCs
- Technology transfer and skill development in host countries.
- Access to larger markets for the home country’s products.
- Higher productivity through economies of scale.
- Disadvantages of MNCs
- Host country: Profit repatriation can limit reinvestment; potential crowding‑out of local firms; risk of labour exploitation.
- Home country: Job losses in domestic industries that relocate abroad; dependence on foreign markets for revenue.
5. Types of trade restrictions
| Restriction | How it works | Typical impact on price/quantity |
|---|---|---|
| Tariff (import duty) | ||
| Tariff | Tax levied on each unit of an imported good. | Domestic price rises → quantity demanded falls; domestic producers gain. |
| Quota | Maximum amount of a good that can be imported in a period. | Supply restriction raises price; creates “quota rents”. |
| Subsidy (export or production) | Government payment to domestic producers/exporters. | Lowers producer cost → price falls abroad; domestic output rises. |
| Embargo | Prohibition of all trade in a particular good or with a particular country. | Eliminates imports/exports of the banned good; often political. |
| Voluntary Export Restraint (VER) | Exporting country agrees to limit its shipments. | Effect similar to a quota but negotiated privately. |
6. Why governments impose trade restrictions
- Protect infant industries – give new sectors time to become competitive.
- Protect jobs – prevent loss of employment in vulnerable sectors.
- Balance of payments – reduce import bill or raise export revenue.
- National security – keep strategic goods (e.g., arms, advanced technology) domestic.
- Political motives – retaliation, sanctions, or to support allied countries.
7. Evaluation of trade restrictions (AO3)
| Arguments in favour | Arguments against |
|---|---|
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8. Quick‑check summary
- Specialisation & free trade → higher productivity, lower prices, but also dependence and vulnerability.
- Globalisation is driven by technology, trade liberalisation, MNCs and policy convergence; it brings economic growth, cultural exchange, migration flows and environmental challenges.
- Trade restrictions (tariffs, quotas, subsidies, embargoes, VERs) are tools used to protect domestic interests, yet they usually reduce overall welfare and can trigger retaliation.