6.1 – International Specialization

To know more about specialization in microeconomics, click here

Specialisation is when a nation concentrates its productive efforts on producing a limited variety of goods and services in which they’re really efficient and productive at and have an advantage over other economies in.

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 of 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 the same amount of a good or service with fewer resources.
For example, India has an absolute advantage in operating call centres because of its abundant and cheap labour force, compared to western countries.

Comparative advantage: when one country can produce a good at a lower opportunity cost (in terms of other goods and services being forgone) than another country. It takes into account the opportunity cost incurred in producing each good.
For example, India may have an absolute advantage in operating call centres (against Philippines), but it has lower opportunity costs in other IT industries, than Philippines. Thus, Philippines has, in recent years, seen a growing call centre industry while India has seen theirs decline.

Note: you are not required by the syllabus to know the terms ‘absolute advantage’ and ‘comparative advantage’, but only the principles.

Advantages of international specialisation:

• Economies of scale and efficiency: just like specialisation by individuals, countries can specialise in what they do best, and this leads to efficiency and economies of scale. It can therefore increase output while reducing costs. When more countries specialise, world output increases.
• Job creation: specialisation leads to increased output and therefore it could lead to more investment and thus jobs are created. Moreover, it requires skilled labour and thus earnings are higher.
• Allows more international trade to take place. Therefore goods and services produced under the most efficient conditions can be traded and all countries can benefit from them.
• Revenue to the government: as income increases and more trade takes place, it can increase government revenue from taxes.
• Wider markets: specialisation and trade allow firms to sell their products to international markets, helping them build international brands and increase market shares and profits.
• Consumer sovereignty: consumer across the globe will now be able to buy cheap and high quality products from around the world. Because of specialisation and trade, we now can get the best chocolate from Switzerland, the best coffee from Ghana and Colombia, 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 that certain types of structural unemployment might occur. As the country moves towards specialisation, the workers in the declining industries will be put out of work.
• Over-exploitation of resources: output maybe increased by over-exploiting Today, international specialization and trade is causing rapid depletion of non-renewable resources like oil and coal. Middle Eastern countries are depleting their oil resources so quickly, they are now building new industries to sustain them in the future.
• Threat of foreign competition: non-specialised industries of a country will face fierce competition from the foreign countries that specialise in them.
• 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 change will greatly affect highly specialised countries. For example, petroleum-exporting countries have seen their revenues dip when oil prices fall. They are now trying to diversify into other products like tourism to sustain them.
• Strategic vulnerability: relying on other countries for vital goods and services makes a country dependent on those 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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