Specialization+&+Trade+(APMICE)

Specialization & Trade ﻿Specialization- A method of production where a business or area focuses on producing a limited scope of products or services in order to increase productive efficiency. Specialization occurs across broad demographics from countries in global trade to businesses in product production. Trade- A transaction between multiple parties that involves the negotiation and exchange of goods and services for desired goods and services possessed by someone else. Currency provides a mean of trade in which money is exchanged for a desired good or service.



- A country or individuals equilibrium price and quantity in producing a product compared to other countries and competitors determines how specialized they are in producing that product - The supply and demand curves are shifted based on how the products are traded
 * Supply and Demand Curves in Relation to Specialization and Trade**

- Full employment of labor and resources determines where the PPF is drawn - If certain countries PPF's are shifted outward due to better technology or another PPF determinant, that country has a comparative advantage over other countries in that product
 * Production Possibilities Frontiers in Relation to Specialization and Trade**

**Benefits of Specialization and Trade** - Both parties gain - Results in a greater output and income - Countries can focus on producing their most efficient products and trade for products they don't make - Improves global resource allocation - Same total inputs of world resources and technology result in a larger global output.

-Comparative advantage is the ability to produce an item at a lower opportunity cost. Comparative advantage determines to what product a country allocates its resources. Although a country has an absolute advantage, or the ability to produce an item with fewer resources, it may still derive benefit from trade.
 * What determines who trades what? **

Ex. Two countries: U.S. and Honduras Production without Trade Product-- U.S.-- Honduras Wheat-- 10 resource units --60 resource units Banana -30 resource units - 20 resource units Total -40 resource units+ 80 resource units = 120 resource units

The U.S. has an total absolute advantage over Honduras, but look at the graph below.

Opportunity Cost of Production Product- U.S.- Honduras Wheat 1/3 Banana-- 3 Banana Banana 3 Wheat 1/3 Wheat

-The U.S. has a comparative advantage in wheat production while Honduras has a comparative advantage in banana production. The two would derive benefit from trade.

Production with Trade -U.S.---Honduras 1 Wheat for U.S.10 resource units1 Banana for Honduras20 resource units 1 Wheat for Honduras-10 resource units1 Banana for Hunduras20 resource units Total20 resource units-+40 resource units = 60 resource units

-This trade would use half the resource units that production without trade would have used. The unused resources could be used for a different good or service, maximizing global output via efficient allocation of resources.

**Article**
http://dealbook.nytimes.com/2011/01/28/at-davos-global-leaders-call-for-trade-pact/?scp=1&sq=global%20trade&st=cse New York Times Article: **At Davos, Leaders Call for Global Trade Pact** Abstract: Leaders of Britain, Germany, and Indonesia hope to create a free trade agreement amongst their countries. The leaders believe that the power of free trade will help enrich the poor nations in a way that is more powerful than other countries aid. In 2008, efforts failed to create such a pact, but this time leaders are honing in on a deal that could benefit the countries in trade with agriculture and other related goods. These leaders feel that open trade is the necessary step they must take to repair their economies and drive their economies to prosperity.