How do we get the most out of our personal limited resource - labor? But we are not really interested in absolute advantage. Absolute advantage may give bragging rights but that's all. If I specialize in teaching economics I would starve unless I was able to exchange the service I provide for food produced by someone else who specializes in farming. In some of the examples and sample problems in this chapter we assume the PPC is a straight line. Specialisation at individual level involves giving workers individual jobs so that the worker’s capacity to one task in particular will increase. Usually this is not the case but this is a convenient assumption for this example. both parties gain as a result of fraudulent exchange. Specialisation also means that the resources are being distributed among small and competing uses at a particular industry or a nation. The PPC for the United States would dwarf that of the island economy. ... 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. If we both spend all our time catching fish, I can catch 8 fish in one hour while you catch 7 fish. In this economics lesson, students will examine the relationship between specialization and trade. When specialization occurs it is when one person does one aspect of a job and voluntary exchange is when buyers and sellers engage in market transactions. The opportunity cost of producing more food increases as we move to the right in the graph. Their economy may be operating at or below the subsistence level (the barest means in terms of food, clothing, and shelter needed to sustain life). In a graph of the PPC the opportunity cost of the good represented on the horizontal axis is measured as the slope on the PPC. You should recognize that this is not a model of economic growth. When we specialize we tend to concentrate our labor on one primary activity. As we noted above if resources are not fully utilized we are operating inside the PPC. For example, if we have a situation of large scale unemployment and factories are sitting idle we can increase output with no opportunity cost to society. Quite simply by what pays you the most for your training and abilities. He supplies the greater part of them by exchanging that surplus...of his own production, which is over and above his own consumption, for...the produce of other men's labor...Every man thus lives by exchanging, or becomes in some measure a merchant. There are several problems with barter: The introduction of money reduced the difficulty or costs of barter. But protectionist efforts designed to avoid such dislocations are "unwise and surely self-defeating" because they make the U.S. economy less productive. The exchange price should fall between 0.5 fish (your opportunity cost) and 0.67 fish (my opportunity cost). In general, countries that have larger investments in capital goods are wealthier and have greater economic growth rates. Who should specialize in what? We do not need to assume the countries are the same size to determine who has comparative advantage using the PPC model. Comparative advantage, specialization, and gains from trade. For the country to become self-sustaining it must shift its PPC outward. The definition of specialization allows for certain ambiguities, as issues of scale and context impinge. an impoverishing specialization in the first period (current specialization) to an enriching global exchange through an optimization of the values chain by industrialization. Let's start with the situation where we are not specializing or trading. For example, the production of artifacts in one region and exchange to another may be considered regional specialization, although artifacts were manufactured by every household. Second, what if we were to compare a small island economy to the United States? For example, consider a simple agricultural economy that can produce only corn or wheat. Finally, there is regional and local specialization. You can then see that Country A has the flattest slope and the lowest opportunity cost and comparative advantage. Ofcourse, this exactly allowed Victorian factories (UK) to grow throughout the nineteenth century and develop themselves and their country simultaneously. And let's think about her opportunity cost for producing a plate. So that is.. and she also has a linear production possibilities frontier, so that right over there is the PPF for Patty. Competition and lower prices: Increased competition for domestic producers acts as an incentive to minimize costs and to be innovative to remain competitive. But how do we really know what paid labor to specialize in? Even though money eliminates the costs directly associated with barter there still remain some costs of exchange that reduce the benefits of specialization. For example, we start with a simple application of the concept of opportunity cost when considering government policy decisions on import quotas or tariffs. Absolute Advantage. For resource co-specialization in enterprise systems implementation, the direct outcome is the success of the exchange between the parties. Increasing opportunity costs is a reflection of the specialized characteristics of resources. We can continue this logic and show in Table 2-1 that the total supply and consumption of coconuts and fish is greatest when we specialize and I only catch fish and you only cut down coconuts and we trade. One political response as mentioned is to protect the jobs. For example, increasing food production from 0 units to 10 units requires only a small reduction in clothing production. Dependency on the whole labour force is increased with very high level of division of labour. Now I have absolute advantage in both coconut and fish production since I can cut down more coconuts and catch more fish in one hour than you can. Moreover, the concept of division of labour or specialization is mainly useful in mass production and assembly lines. No exchange can...be made between them. the increase in the value of goods produced in a country in a year) of a county lies in the concept of division of labour. We can apply the microeconomic concepts of opportunity cost and specialization to entire countries with our first macroeconomic model - the Production Possibilities Curve (PPC). The exchange price should fall between 0.5 fish (your opportunity cost) and 0.67 fish (my opportunity cost). Higher output: the total output of goods and services will increase and the quality of goods and services produced will increase. In one hour you can cut down 14 coconuts or catch 7 fish. What is Division of Labour 3. The opportunity cost of each coconut is 2/3 fish. The slope of the PPC becomes more negative as we move from left to right on the curve. For example, the most fertile land is first transferred from raising sheep to growing food. Recall that the combination of limited resources and unlimited wants implies scarcity. One good or service is exchanged directly for another. Trade increases total wealth by allowing a person to specialize in those products that he or she produces at a lower opportunity cost than others and trade for those goods that others produce at lower opportunity cost. A higher output with lower prices will mean more wants will be satisfied with the given amount of scarce resources. If I produce 1 more fish I must give up 1.5 coconuts (my opportunity cost). ! There are many advantages and disadvantages to specialisation, which became common place during the industrial revolution with the creation of factories and the use of division of labour. Since I can catch more fish I have absolute advantage in catching fish. We can't answer that question without more information - specifically people's preferences. There are other aggregated combinations that reveal interesting tradeoffs such as all consumer goods versus all capital goods. The article is organized as follows: Section 2 presents stylized facts of African international trade and defines a specialization rule. Money can be used to buy any goods and services offered for sale. (The details of this calculation are provided in the sample problems for this chapter.). This can lead to increase speed and accuracy and skill in the narrow range of tasks he perform. In Rethinking Craft Specialization in Complex Societies: Archaeological Analyses of the Social Meaning of Production, edited by Z. Hruby and R. Flad. The exchange of products will take place between the countries and it leads to an increase in sales volume and profits in trade. of nuts Then the consumptions are: Susan: 15 lb. But let's change your capabilities to cutting down 10 coconuts or catching 5 fish in one hour. I would to thank the writer of this topic of division of labour for good explanation which gave me courage , i had thanks him or her for the knowledge he /she spread to whole world . Ricardo's theory is the subject of this chapter because it goes beyond explaining specialization by individuals to justify why countries (macroeconomies) also specialize and engage in trade. This implies opportunity costs are constant. The relationship between household production (i.e., the unpaid time spent on housework and care) and market products depends first on how the population is distributed by household type (especially singles versus families) and on the degree of substitutability between household products and market products. Adam Smith recognized that the increased productivity of labour after division happens due to the following reasons. voluntary exchange causes specialization. A bigger market: specialisation and international trade increases the size of the market, offering opportunities for large-scale of production for a larger market. Competition will help to keep the prices lower in the economy. Money is a common medium of exchange and represents general purchasing power. Let's use our tropical island example to identify who has absolute and comparative advantage in the production of fish and coconuts. For example, during the 1970s many blamed the plight of the economy on the slow decay of some heavy industries such as steel. These resource factors include: The availability of natural resources is of course a major determinant of comparative advantage. In the long-term, this may lead to unemployment, a type of structural unemployment where the worker is replaced by a machine, and because the worker’s skill is no longer required, the worker has trouble finding employment, because he is not trained in anything else. However, 10 workers working together specialising in the production of pins will produce 48000 pins a day. I get 6 coconuts and 4 fish and you get 7 coconuts and 3.5 fish. They stay or stand in one place. This is specialisation at national level. In one hour I can cut down 12 coconuts or catch 8 fish. If the country devoted all of its resources to consumption today it still would not satisfy the basic minimal needs of its population. First let's calculate what the opportunity cost is for each of our production options. He pointed out that a worker will be able to make 20 pins a day if he were to do all the tasks of pin production himself. We suggested that individuals and nations have an incentive to specialize but should they concentrate on producing only 1 product? This example is identical to the problem faced by our island castaways that we discussed above. When the division of labor has been...established, it is but a very small part of a man's wants which the produce of his own labor can supply. There are several reasons. Section 3 develops the Table 2-2 below shows different combinations of the maximum possible quantities that can be produced with the resources that are available on our island: The table identifies six production possibilities, options A through F. Each option represents the amount of food and clothing that our island economy can produce given full and efficient utilization of our available resources. If I can produce a good or service at a lower opportunity cost than you then I have a comparative advantage. Individuals seek those jobs they are capable of performing and that pay the highest wage or salary. Each problem often requires the unique application of some part of the theory. There is one distinction we should make. But why is specialization efficient? Similarly, foreign trade provides an outlet for a country’s surplus produce, which arises from specialization in the production of those commodities which it can produce more cheaply than other countries can and which it exchanges for the surplus products of other countries. If the PPCs were bowed outwards then we would have the situation of increasing opportunity costs. However, specialization can have both positive and negative effects on a nation’s economy. Hence increasing the production process into a great extent. Exchange is only possible because of production and specialization, production which is the creation of utility in the aspect of goods and services can be enhance through the breaking down of jobs into different segment, division of labor and specialization therefore leads to increase or excess in production, this excess therefore needs to be exchange for what others have also produced, for instance a producer of shoes can exchange … Some automation (use of specialised machinery) may arise from the division of the general manufacturing process into small, separate and simple tasks. We can illustrate the incentive to specialize and exchange with a simple example. We act in our rational self-interest by seeking out those activities that minimize our opportunity costs (or equivalently, maximize net benefit). Would you be willing to give me 3 coconuts? The same analysis would apply to the exchange price of coconuts. This is a simple explanation why most economists oppose trade barriers (such as tariffs or import quotas) on principle. Many different commodities...were employed for this purpose. Increased specialization ultimately leads to higher standards of living for all those involved in economic exchanges. While economists may feel comfortable with the argument that specialization with free trade would make everyone better off, politics is not so lucky. As country B increases production of coconuts it sacrifices the smaller volume of fish production. a curve that does not shift. Specialization and Exchange 3.1 PRODUCTION POSSIBILITIES Production Possibilities Frontier Production possibilities frontier The boundary between the combinations of goods and services that can be produced and the combinations that cannot be produced, given the available factors of production and the state of technology. One country can not have comparative advantage in both goods. With increased division of labour, the breakdown of one particular machine in the middle of a production line or an absence of a worker can halt the whole production process. Adam Smith was one of the first economists to explicitly identify the productive benefits of specialization, which he referred to as the "division of labor.". Nevertheless, the simple model we have presented is sufficient to address some questions. Adam Smith also emphasized incentives for technological advancement. With barter no money is used. For example, Maldives specialises in tourism and fishing products, Sri Lanka and India specialises in the production of tea. 2007 Thinking About Production: Phenomenological Classification and Lexical Semantics. Humanitarian aid would be required. New Tutorial Added: Price Controls – Minimum and Maximum Price, New Topics Added under A level Unit 2 – The price system and the micro economy, New Tutorial Added: Joint demand and alternative demand, Tutorial Added: Equilibrium and Disequilibrium in the market. In the rude ages of society, cattle are said to have been the common instrument of commerce...The armour of Diomede, says Homer, cost only nine oxen; but that of Glaucus cost an hundred oxen. What do we do? Consequently it is impossible to produce outside the production possibilities curve (above and/or to the right of the PPC) because of scarcity of resources. Relationship Between Division of Labour and Specialization 5. In option A all available resources are dedicated to the production of clothing. What is the relationship between specialization and voluntary exchange? For example, if a factory produces only one hundred cars per year, each car will be quite expensive to make on average. 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