Specialization and its relationship with trade

specialization and its relationship with trade

However, because of specialization and trade, the absolute quantity of goods . Analyze the relationship between opportunity cost and comparative advantage. best represents specialization and its relationship with trade? serii.infote advantage b. Economic crises c. Comparative advantage d. All the above. see more. trade specialization reduces poverty but only if the right complementary policies . Relationship between trade and poverty, panel data estimates

Relationship Between Specialization and Trade

Therefore we can both gain if we sell them wheat and they sell us oil. This reduces scarcity by giving us more satisfaction from the same amount of resources. Differences in Preferences Even if two countries have identical resources they my benefit from trade if they have different preferences, Let's assume that the US and Great Britain have identical resources for the production of coffee an tea.

specialization and its relationship with trade

So both countries can produce both products. But in the US we prefer coffee and in Great Britain they prefer tea. So we can both achieve more satisfaction from the same amount of resources if we sell them our excess tea and they sell us their excess coffee. Differences in Productivity First a few definitions. What is the difference between: If Joe can produce 10 bikes a day and if Jane can produce 20 bikes a day, Jane is more productive than Joe.

So, if Joe can produce 10 bikes a day and if Jane can produce 20 bikes a day, Jane is more productive than Joe.

specialization and its relationship with trade

Absolute Advantage is the ability to produce a good or service with fewer resources because of greater productivity. Let's see how differences in productivity absolute advantage results in specialization and exchange trade.

One is an attorney, the other a mechanic. We could say that the lawyer is more productive at doing law than is the mechanic since he or she can do it in less time. And the mechanic is more productive at fixing cars.

specialization and its relationship with trade

So it doesn't surprise us that if the lawyer's car breaks down he or she will bring it to the mechanic to get it fixed. The lawyer trades with the mechanic. Below are the production possibilities curves for two countries: Notice that we have assumed constant costs so that the curves are straight lines. In a previous lecture we said that PPCs are concave to the origin because all resources within a country are not the same the law of increasing costs.

Here, we assume that all resources in the US are the same so there are constant costs and the PPC is a straight line.

Relationship Between Specialization and Trade

The resources in France are also all identical to each other but different than those in the US so France also has constant costs and a straight PPC. Lets begin by assuming that initially there is no trade and each country is self-sufficient - producing all of its own bread and wine.

When countries decide which country will specialize in which product, the essential question becomes who could produce the product at a lower opportunity cost. Term The cost of an opportunity forgone and the loss of the benefits that could be received from that opportunity ; the most valuable forgone alternative. Full Text Specialization refers to the tendency of countries to specialize in certain products which they trade for other goods, rather than producing all consumption goods on their own.

Countries produce a surplus of the product in which they specialize and trade it for a different surplus good of another country. The traders decide on whether they should export or import goods depending on comparative advantages.

specialization and its relationship with trade

Imagine that there are two countries and both countries produce only two products. They can both choose to be self-sufficient, because they have the ability to produce both products. However, specializing in the product for which they have a comparative advantage and then trading would allow both countries to consume more than they would on their own.

One might assume that the country that is most efficient at the production of a good would choose to specialize in that good, but this isn't always the case. Rather than absolute advantagecomparative advantage is the driving force of specialization. When countries decide what products to specialize in, the essential question becomes who could produce the product at a lower opportunity cost.

specialization and its relationship with trade