A) Specialisation and the division of labour: reference to Adam Smith:
Adam Smith was a key economist during the 1700s and was best known for his book, the wealth of nations. Specialisation occurs when a country/business decides to focus on making a particular good/service. The division of labour occurs when the production process of a good is broken down in to various small tasks. Adam Smith argued that through specialisation and the division of labour production could be increased and extra wealth could be created. This is due to the fact that specialisation results in an increase in productivity due to repetition and the incorporation of automation in the production process as well as less time spent switching between tasks. The example that Adam Smith used was of a pin factory where one worker may make the head, another may make the bottom and then another worker assembles the pin. Smith also argued for specialisation on a larger scale so that each country specialised in certain goods/services, he argued this would result in higher incomes and standards of living.
B) The advantages and disadvantages of specialisation and the division of labour in organising production:
- Increased output – As a result of the repetitive nature of specialisation it means that workers develop greater skill in performing their particular task. As a result of this, workers are able to produce more goods in the same amount of time when specialisation and the division of labour take place.
- Less wastage – As workers become more skilled at their particular task they make less mistakes as well as less time thus increasing efficiency and reducing wastage.
- Lower unit costs – The economies of scale gained from the increased output cause unit costs to decrease. For example, as output increases it may mean that the business can buy in bulk and therefore gain greater discounts.
- Boredom – One of the main drawbacks of the specialisation and the division of labour is that the autonomy of the process can result in boredom amongst workers. This may result in workers to become less productive. Furthermore, in the case of Henry Ford’s Model T production line it meant that workers had to be paid more as compensation for the monotony of their work.
C) The advantages and disadvantages of specialising in the production of goods and services to trade:
- Greater output – As a result of countries specialising in certain goods/service output increases. This is due to the fact that by focusing on certain goods/services it allows businesses to become better at producing them and therefore they’re able to produce in greater quantities. This will cause unit costs to decrease thus increasing consumer surplus and the prices of goods/services decrease.
- Greater variety – By different countries specialising in different goods it allows for greater variety within the goods. For example, a country may specialise in the production of hoovers. Although the good being specialised in is hoovers, there will be a range of different types of hoovers produced thus giving customers more choice within particular goods.
- Economic growth – Specialisation also allows greater quantities of goods to be produced and therefore increased trade. Countries can benefit from this, especially if their export revenue is greater than import expenditure. This is because trade is one of the components of Aggregate demand (Exports – Imports) and therefore can lead to economic growth.
- Structural unemployment – By specialising in a certain good/service it increases the risk for certain countries. This is due to the fact that if another country becomes better at producing a certain good than the domestic country then it will result in a decline in sales in the domestic country. This is due to changes in comparative advantage. This can result in de-industrialisation as the domestic country can no longer compete with other countries. As the domestic country specialised in certain goods/services it means that the domestic workers will have a narrow skill set. As a result of this, they do not have the necessary skills to find employment in other sectors. This can cause serious harm to the economy as workers become long term unemployed causing a reduction in the productive potential of the economy.
- Over reliance – Specialisation can cause Countries to become over reliant on their trading partners. For example, one country may sell vegetables to the domestic country as they are the best in that area. However, if there is a draught in that country then it will affect the ability for them to produce vegetables. As a result of this, the supply of vegetables in the domestic country is likely to reduce massively. This problem could be prevented if countries did not specialise meaning that the domestic country could buy vegetables from a range of different countries. As a result of this, a draught in one of the counties is not a big problem as the domestic country is still able to buy them from other countries.
- Changing tastes/fashions – It may be difficult for countries to specialise in goods that are prone to changes in tastes and fashions. This is due to the fact that firms may find it difficult to adapt to these changes if they’re overspecialised.
- Finite resources – A country may specialise in certain goods that need the same resources. This may lead to finite resources depleting which can cause problems for the country in the long term. By producing lots of different goods It is more likely that different resources will be consumed at a slower rate thus decreasing the risk of resource depletion.
D) The functions of money (as a medium of exchange, a measure of value, a store of value, a method of deferred payment):
The functions of money
- A medium of exchange – Money allows people to buy goods in exchange for money. Before money, goods used to be exchanged for different goods (bartering). However, this used to cause problems due to the fact that the person selling the good may not always want the good that the person is proposing to use as a medium of exchange.