Definition of specialisation by country

International Trade and Globalisation – Specialisation and Free Trade

Objective

Define specialisation by country and explain why it occurs.

Definition of Specialisation by Country

Specialisation by country occurs when a nation concentrates its resources on producing a limited range of goods or services in which it has a comparative advantage, and imports the rest from other countries. This enables the country to achieve higher overall output and standards of living.

Key Concepts

• Comparative Advantage: The ability to produce a good at a lower opportunity cost than another country.
• Opportunity Cost: The value of the next best alternative forgone when a choice is made.
• Absolute Advantage: When a country can produce more of a good with the same resources than another country.
• Free Trade: The removal of tariffs, quotas, and other barriers to the exchange of goods and services between countries.

Why Countries Specialise

1. To exploit comparative advantage and minimise opportunity costs.
2. To achieve economies of scale – larger production runs lower average costs.
3. To gain access to a wider variety of goods and services.
4. To stimulate economic growth through increased efficiency and productivity.

Illustrative Example

Consider two countries, Country A and Country B, producing textiles and electronics.

Because Country A gives up fewer electronics to produce one unit of textiles (opportunity cost = 0.4 electronics) than Country B (opportunity cost = 0.75 electronics), Country A has a comparative advantage in textiles. Conversely, Country B has a comparative advantage in electronics.

Economic Gains from Specialisation

The total output of both goods increases when each country specialises and trades. This can be shown using a simple production possibilities model:

\$\text{Total Output}{\text{after trade}} = \text{Output}{\text{A, textiles}} + \text{Output}{\text{B, electronics}} > \text{Total Output}{\text{no trade}}\$

Diagram Suggestion

Summary

• Specialisation by country means focusing production on goods where the country has a comparative advantage.
• It leads to higher efficiency, lower costs, and greater variety of goods for consumers.
• Free trade policies facilitate the exchange of specialised goods, maximising the benefits of globalisation.