Question

Explain what is meant by specialization and trade and why countries are better-off through specialization and trade.

Answer 1

Specialisation is a term used to describe the ability to produce a particular product or to practice and economic activity with increased efficiency each time the activity is done. This indicates that when a country produces a product with specialisation it produces it it at a (opportunity) cost that is lower relative to other countries. According to the ricardian comparative advantage theorycountries should specialise in the production of goods and services and should trade the same with other countries in which they have comparative advantage. Comparative advantage can be detected by measuring the opportunity cost of production of different goods and services. those goods and services in which the country finds itself having a lower opportunity cost relative to other countries, should be produced and exported

Countries are always better off with specialisation and trade if if there are no transaction cost involved and there are no trade barriers. The reason why they are always better off is it due to the fact that they are producing those goods and services in which they have the lowest opportunity cost. By trading such goods, they can receive gains from trade and increase their post trade consumption.