Specialisation and Free Trade » Specialisation by Country

What is specialisation by country?

Think about your phone, your trainers and your breakfast. Many of the things you use were made in different countries. Coffee may be grown in one place, the phone made in another and the trainers made in a third. That happens because countries do not try to make everything themselves.

In Division of Labour you met specialisation for workers: each worker concentrates on one task. Countries do the same thing on a bigger scale.

Key terms:

• Specialisation by country: when a country concentrates its resources on producing a limited range of goods and services, rather than trying to produce everything.

Why do countries specialise?

Countries are different. Some have fertile land and a warm climate. Some have oil or minerals. Some have many skilled workers or lots of capital. The spec gives two linked reasons for specialisation:

So countries produce what they are relatively best at. This means the good they can make while giving up the least of something else (their opportunity cost is lowest).

A simple two-country example

Here is a made-up example. Arvon and Belmir each have all their workers and resources ready for one week. The table shows the most each could make of one good if it made nothing else.

Country	Coffee (tonnes)		Phones (thousands)
Arvon	100	or	50
Belmir	40	or	80

Step 1: no specialisation. Suppose each country splits its resources half and half.

• Arvon makes 50 tonnes of coffee and 25 thousand phones.
• Belmir makes 20 tonnes of coffee and 40 thousand phones.
• Total: 70 tonnes of coffee and 65 thousand phones.

Step 2: find what each is relatively best at. In Arvon, 1 thousand phones costs 2 tonnes of coffee (100 ÷ 50). In Belmir, 1 thousand phones costs only half a tonne of coffee (40 ÷ 80). So Belmir is relatively best at phones and Arvon is relatively best at coffee.

Step 3: specialise. Arvon puts everything into coffee: 100 tonnes. Belmir puts everything into phones: 80 thousand.

Total: 100 tonnes of coffee and 80 thousand phones. That is 30 tonnes more coffee and 15 thousand more phones from the same resources. The two countries can then share the extra output by trading with each other. You will study this in Free Trade.

Advantages of specialisation for a country

• Higher output. Resources are used where they are most productive, so more is produced in total.
• Lower costs. A country that makes one product on a large scale can often lower the cost of each unit.
• Better skills and quality. Workers and firms get better at what they do, and may use better technology.
• Export income. A country can sell what it makes at a competitive price, so firms and the country earn more income.

Disadvantages of specialisation for a country

• Over-dependence. If a country relies on one or two products, a bad harvest, a fall in world price or a fall in demand can hurt the whole economy.
• Unemployment. If the main industry shrinks, workers have skills that are hard to use elsewhere. This is structural unemployment.
• Dependence on other countries. The country must buy many goods from abroad. If supplies stop or prices rise, it has few alternatives.
• Resource problems. Heavy use of a resource such as oil or fish can use it up or damage the environment.
• A narrow economy. Resources are tied up in a few industries, so other industries may not develop.

Exam-style question

Quillara has a warm climate and very fertile land. Most of its farmland grows bananas, which it produces at a low cost. Bananas make up most of its export earnings. Quillara makes few machines and imports most of what it needs.

(a) Define specialisation by country. [2 marks]

(b) Explain why Quillara may concentrate on growing bananas. [4 marks]

(c) Discuss whether specialisation is good for Quillara. [6 marks]