Specialisation and free trade

Specialisation by country

Export - a good or service sold to a buyer in another country.

Import - a good or service purchased from a seller in another country.

Specialisation by country - when a country concentrates its resources on producing a narrower range of goods and services and trades for other products.

Resource allocation - the way scarce resources are distributed between different uses.

Countries have different climates, natural resources, labour skills, technology and capital. They therefore face different production costs. A country may allocate more resources to products it can produce at relatively low cost or with particularly suitable resources, then exchange some of that output for imports.

Core chain: Suitable or low-cost resources -> resources move into the product -> output and exports rise -> export earnings finance imports that would be costly or impossible to produce domestically.

Advantages and disadvantages of specialisation

Possible advantages	Possible disadvantages
Resources are used where they are most productive, increasing total output.	Dependence on a narrow range of exports makes income vulnerable to changes in world demand or prices.
Repeated production can raise workers' skills and firms' efficiency.	Workers in industries that contract may become structurally unemployed.
Larger output can lower average costs and support lower prices.	Dependence on imported essentials creates risk when transport or trade is disrupted.
Export markets can support employment, income and economic growth.	Overuse of a natural resource can cause depletion or environmental damage.
Trade gives consumers access to products the country cannot efficiently produce.	Benefits may be concentrated in particular firms, workers or regions.

Who gains or loses from country specialisation?

Decision-maker	Possible gains	Possible costs
Consumers	Lower prices, greater choice and access to products not efficiently made at home.	Dependence on imports and exposure to supply disruption; some local products may disappear (be outcompeted).
Firms	Larger export markets, skilled workers, lower average costs and imported inputs.	Greater exposure to world demand, prices and foreign competition.
Workers	More jobs and higher wages in expanding specialist industries.	Structural unemployment or regional decline in contracting industries.
Economy	Better resource allocation, higher output, export earnings and growth.	Overdependence, unequal gains and possible resource depletion or environmental damage.

Free trade

Free trade - international trade without government restrictions such as tariffs, import quotas or embargoes.

Economies of scale - reductions in average cost caused by producing on a larger scale.

Free trade allows the gains from specialisation to be realised. Domestic buyers can purchase foreign products, while domestic firms can sell to a larger international market.

Advantages of free trade	Disadvantages of free trade
Greater consumer choice and access to goods unavailable at home.	Less competitive domestic firms may close, causing unemployment and regional decline.
Foreign competition can lower prices and improve quality.	New or strategically important industries may be unable to compete with established foreign firms.
Specialisation can improve resource allocation and world output.	Countries can become dependent on imports or foreign demand.
Firms gain larger markets and may achieve economies of scale.	Extra transport and production may increase pollution and resource use.
Imported raw materials and capital goods can reduce costs and raise productivity.	The gains may be distributed unevenly between consumers, workers, firms and countries.