Specialization and Trade (Comp. Advantage)

Specialization

Specialization occurs when individual (workers, firms, countries) focus on single tasks, enabling each to become more efficient and productive.

Law of Comparative Advantage: The entity with the lowest opportunity cost of producing an output should specialize in that output.

Division of Labor: The organization of production so that individual workers focus on specific tasks.

• takes advantage of individual preferences and natural abilities 
• allows for workers to gain experience 
• reduces the need to shift between different tasks 
• permits the introduction of labor-saving machinery

International Trade 

Key issues:

• Which country can produce the most?
• Which country is the most efficient?
• How is efficiency measured?
• How can trade based on efficiency lead to improvement for both trading partners?

Law of comparative advantage 

• The entity that has the lowest opportunity cost has comparative advantage.

• The entity that can produce more of a good or service than others with similar resources has absolute advantage.

• Each country will seek a trade that is BETTER than their own domestic opportunity cost.  

• If they can’t do better in trade than they could produce on their own, then they don’t trade.

• When each country trades, based on lowest opportunity cost, both can gain more in trade than they could produce domestically.  
• Therefore, they can “exceed” their own production frontiers.