IGCSE®/O Level Economics

6.1 International trade and

specialization

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 What is globalization?
The increasing social, technological, political and economic interdependence and interaction
between people, firms and entire economies around the world, through:

• increasing ease of travel ▼ Value of global trade in physical goods, 1960–2010

• growing international trade in an increasing
variety of goods and services
• increasing opportunities for firms to buy and
sell products in any country in the world
• increasing opportunities for labour and
capital to move anywhere in the world
• the growth of global financial markets

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 International specialization
Economies specialize in the production of those goods and services they are best able to produce
because they have the natural, human or man-made resources to do so
Specialization allows an economy to produce a greater volume of their goods and services more
efficiently. It therefore increases output, incomes and living standards
Economies then trade with each other to obtain the other goods and services they need and want

US aircraft Spanish olive oil Italian shoes

▲ Some examples of international specialization

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 Absolute and comparative advantage

A B
A country has an absolute advantage in
the production of a product when it can
produce that product at a much lower cost
per unit than any other country is able to
Average cost per unit Average cost per unit
$100 $130

X Y
A country has a comparative advantage in
the production of a product relative to other
countries when its opportunity cost of
producing that product is lower than in any
To produce 100 more To produce 100 more other country
cars, country X must cars, country Y must
give up 4,000 televisions give up 7,000 televisions

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 The gains from free trade
International trade involves the movement and exchange of physical goods such as
materials, component parts, equipment and finished products as well as services,
ideas, money and labour, across international borders

Arguments for free trade

• It allows countries to benefit from specialization
They can produce what they are best able to and then trade their surplus
• It increases consumer choice
Consumers can enjoy a greater variety of goods and services from across the world
• It increases competition and efficiency
Firms must improve their costs and product quality to compete with overseas producers
• It creates additional business and employment opportunities
New and existing firms can expand their sales to growing consumer markets overseas
• It allows firms to access the best workforces, materials and technologies from
anywhere in the world

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 Arguments against uncontrolled trade

Why control trade?

•Trade with low-cost economies is threatening jobs in many developed

economies and reducing opportunities for less-developed economies to
grow their industries

•Trade is increasing the rate at which we are depleting natural resources

•Trade may increase the exploitation of workers and the environment in
many less-developed economies as multinationals are attracted to them
by low wages and taxes

•It has increased the gap between rich and poor nations
because developed and rapidly developing economies dominate global demand for
many natural resources, including foodstuffs, timber and metal ores, and have used
their purchasing power to force down their market prices

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 Trade barriers
Tariffs
Trade barriers are indirect taxes on the prices of
imported goods to discourage domestic demand

But imposing them often results in affected

overseas countries imposing tariffs of their own in
retaliation

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 Non-tariff barriers
Subsidies

These are government grants paid to domestic producers to reduce

their production costs, enabling them to sell their products at lower
prices than overseas producers

Quota

This is a limit on the volume of an imported good allowed into a country

Embargo

This is a ban on the importation of a product or products from overseas

Size and weight restrictions
Unreasonable quality controls, standards and licensing Import licence
requirements for imported products

These make the import of goods into a country more difficult Test certificates

and costly Product labelling requirements

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 Arguments for trade protection
• To protect infant (or sunrise) industries
Protecting new firms from overseas competition gives them the time and chance to develop, grow
and become more globally competitive
• To protect sunset industries
Protection from overseas competition will help to slow down the rate of decline in and loss of jobs
from some major industries, allowing time for other industries to develop to provide new jobs and
incomes
• To protect strategic industries, such as agriculture, energy and defence equipment
So that a country is not entirely dependent on such important supplies from overseas countries
• To protect domestic firms from dumping
Dumping is a form of predatory pricing. It involves one country ‘flooding’ another with a product at
a price significantly below its market price to force rival producers out of business
• To limit over-specialization
Trade barriers can help a country to maintain a wider range of different industries to reduce the risk
of its main industry failing or declining due to overseas competition
• To correct a trade imbalance
By reducing the amount of imports coming into a country

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 Arguments against protectionism
• It reduces the gains from trade

• It restricts consumer choice

• It restricts new business opportunities

• Inefficient domestic firms protected from overseas competition

will continue to be inefficient

• Other affected countries will retaliate against trade barriers

Trade liberalization involves the removal of barriers to

trade between different countries to improve the global
allocation of resources and allow economies to realize
gains from increased trade and market access

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