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Specialization is when a nation concentrates its productive efforts on producing a limited variety of goods in which they’re really efficient and productive at and have an advantage over other economies in producing them.
For example, due to the existence of vast oil and gas reserves in the region, Middle-Eastern countries concentrate their production on petroleum and have made a fortune off it
Specialisation is determined on the basis of either resource allocation or of cost of production.
Absolute advantage: when one country can produce more efficiently than another either by producing more of a good or service with same amount of resources or producing same amount of a good or service with fewer resources.
E.g.: India has an absolute advantage in operating call centres because of its abundant and cheap labour force, compared to most countries, say the Philippines.
Comparative advantage: when one country can produce goods at the least opportunity cost (in terms of other goods and services being forgone) than the other countries. Or in other words, it takes into account the opportunity cost incurred in order to achieve absolute advantage.
E.g.: India may have an absolute advantage in operating call centres against the Philippines but it gains more and thus has lower opportunity costs in the IT sector. The call centre industry has thus been declining in India, while the Philippines has seen a boom in its call centre industry because they have a comparative advantage in relating to American customers.
Note: you are not required by the syllabus to know the terms ‘absolute advantage’ and ‘comparative advantage’, but only the principles.
Advantages of international specialization:
- Economies of scale and efficiency: just like specialization by individuals, countries can specialize in what they do best, and this leads to efficiency and economies of scale. It can therefore increase output of the country while reducing costs. When more countries specialize, world output increases.
- Job creation: specialization leads to increased output and therefore it could lead to more investment and thus jobs are created as the output increases. Moreover, it requires skilled labour and thus earnings are higher.
- Allows more international trade to take place and therefore more goods that other countries produce can be imported as well. Therefore it increases choice for the people of the country
- Revenue to the government: as income increases, and as more trade takes place, it gives the possibility for the government to increase the revenue.
- Wider markets: specialisation and trade, allows firms to sell their products to international markets, helping to build an international brand increase market shares and profits
- Consumer sovereignty: consumer across the globe will now be able to buy cheapa and high quality products from around the world. Because of specialisation and trade, we now can get the best chocolate from Switzerland, cheap IT services from India, oil from the Middle East and budget cars from Japan.
Disadvantages of international specialization:
- Structural unemployment: even though national level specialisation usually creates more jobs, there is a risk of certain types of structural unemployment to occur. As the country moves towards specialisation, the workers in the declining industries may not find suitable work for them
- Over-exploitation of resources: output maybe increased by over-exploiting resources. In this case today’s output is increased at the cost of the future generations.
- Negative externalities/ social cost: There could be external costs like damage to the environment.
- Threat of foreign competition: industries that are not being specialised in will face more foreign competition for their products, because the country is not focusing on those industries
- Risk of over-specialisation: because of more international dependence on other countries for trade (they will have to sell their specialised products to other countries and buy other products they need from abroad), any global economic changes will greatly affect highly specialised countries. For e.g., this has been a problem for petroleum-exporting countries, for whom the drop in oil prices have caused major decrease in revenue. They are now trying to diversify into other products like tourism to sustain themselves
- Strategic vulnerability: relying on another countries for vital goods and services it needs makes a country dependent on those other countries. Political or economic changes abroad may impact the supply of goods or services available to the country.
Notes submitted by Lintha
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