CIE IGCSE Economics 0455 Section 3 - Unit 14

UNIT 14 – SPECIALISATION, EXCHANGE AND MONEY Specialisation occurs when a factor of production is devoted to a specific job in a production process. This applies to all factors of production - land, labour, capital and enterprise. By specialising and trading, countries can increase overall output. The following are examples of specialisation by individuals, firms, regions and countries.  Individuals - People might specialise, for example, as accountants, bankers, construction workers, demists or engineers.  Firms - McDonald's, Burger King, KFC and Pizza Hut specialise in the output of fast food, whereas DHL, FedEx and UPS specialise in the provision of courier services.  Regions - Silicon Valley in northern California, USA, specialises in the provision of high-tech information communication technologies; London, Tokyo and Shanghai are financial districts; Paris and Milan are major world cities for fashion and design.  Countries - Bangladesh and India are major producers and exporters of textiles; Scotland is famous for its whisky; Thailand and Vietnam specialise in the production of rice; and Caribbean countries such as Jamaica and Tobago specialise in tourism.

Specialisation of labour Specialisation of labour occurs when a worker becomes an expert in a particular profession, such as a landscape architect, a psychiatric nurse, an electrical engineer or an economics professor. It can also occur when a worker becomes skilled in a part of a production process, e.g., supermarket checkout operators, waiters serving people in a restaurant, and factory workers who operate machinery. Specialisation allows workers to become more skilled and efficient at their jobs, thus increasing the quantity and quality of the goods or services being provided.

Advantages of specialisation for the individual (worker)  Workers become experts in their field, so their productivity increases.  The quality of the product or service increases.  Workers can become very skilful, so their earning potential may increase.

Disadvantages of specialisation for the individual  The work may become repetitive and boring.  Workers may become alienated, especially those specialising in low-skilled work.  The production process may become overspecialised - that is, too dependent on an individual worker or group of workers.  The workers may become deskilled in other areas, meaning there is a lack of flexibility.

Specialisation at regional and national level International specialisation occurs when certain countries concentrate on the production of certain goods or services due to cost advantages, possibly from an abundance of resources.

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Benefits of specialisation at regional and national level 1. Efficiency gains - Specialisation makes better use of scarce resources. As a result, productivity increases, thereby increasing the country's gross domestic product.

Taiwan and South Korea, for example, have been able to raise their standards of living by specialising in the production of manufactured consumer electronic devices.

Taiwan's Foxconn is the world's largest manufacturer of smartphones and tablet computers. South Korea's Samsung is the world's largest maker of LCD televisions.

2. Labour productivity - Workers become more skilled in the jobs they do because they are able to concentrate on what they do best. Therefore, it improves labour productivity and enables better-quality products to be produced. Thus specialisation can benefit firms, regions and the country.

3. Increased productive capacity - International specialisation can help to shift the production possibility curve of a country outwards due to its increased productive capacity. Thus, specialisation leads to increased national output.

4. Economies of scale - Specialisation increases national output and global trade.

Therefore, firms are able to enjoy cost-saving benefits from large-scale operations, known as economies of scale. This can help to keep prices down and therefore helps to keep inflation under control.

5. Improved competitiveness - Specialisation helps to enhance international trade and exchange. Competitive prices also improve the international competitiveness of a country, thereby boosting its economic growth. After all, specialisation and trade are essential for improving a country's standard of living.

Disadvantages of specialisation Despite the potential benefits of regional and national specialisation, there are several drawbacks.

1. Overspecialisation in a region can cause structural and regional unemployment.

Countries that overspecialise also suffer the most during an economic downturn, as they do not have a variety of goods and services that they can rely on to survive. For example, Liberia is highly dependent on its agricultural output, which accounts for around 61 per cent of its GDP. Adverse weather conditions could wipe out much of its agricultural production, thus severely harming the economy.

2. High labour turnover occurs if lots of workers choose to leave their jobs in search of more challenging and less boring ones. In a country that has a labour turnover rate of 12.5 per cent, one worker in every eight changes jobs each year. The higher this rate, the more expensive it is for the economy, as firms have to continually hire and train workers. Industries that suffer from high labour turnover tend to pay low wages to low-skilled workers, such as those working in call centres, retailing, catering (including fast-food restaurants), supermarkets and hotels.

3. Low labour mobility - Low-skilled and poorly paid workers tend to receive little training, so they may not dewlap the necessary skills to find alternative jobs. Again, this can lead to structural unemployment. Highly skilled workers, such as pilots, demists, software developers, financial advisers and attorneys can also find it extremely difficult to change to alternative professions and careers. Job specialisation also makes cross-functional training difficult - in other words, workers only have a narrow understanding of the overall business. By contrast, cross-functional training would help to make workers more versatile and expand their skills. This lack of labour Š Niaz Mahmud

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market flexibility can reduce the economic efficiency and international competitiveness of the country.

4. Lack of variety for consumers - Specialisation often leads to standardised, massproduced goods. An example is Foxconn, which manufactures the iPhone and iPad for Apple. These devices Jack variety and only come in one of two colours. Domestic customers may look at alternative imported products from foreign suppliers, thereby reducing the competitiveness of domestic firms that overspecialise.

5. Cost - Firms that employ workers with highly specialised skills tend to face very high salary demands. This can have a negative impact on the profits of firms and potentially reduce their competitiveness.

Functions of Money The four key functions of money, as suggested by Economists, are: 1. Money acts as a medium of exchange - For something to be considered as money it must function as a way to conduct trade. Money is widely recognised and accepted as a means of payment for goods and services.

2. Money is a measure of value - Money is a unit of account, as it measures the market value of different goods and services. It is far more efficient for trading purposes to express the price of goods and services in dollars (or another monetary value) rather than using products such as cloth, shells, salt or livestock - all of which have been unsuccessful forms of money in history.

3. Money is a store of value as it can be stored and used at a later date in the future. This means that money must be able to hold its purchasing power over time. Money therefore gives firms and households flexibility in the timing of their sales and their purchases, thus removing the urgency to trade straightaway.

4. Money is a standard of deferred payment - This means that money is used as the standard for future (deferred) payments of debt. For example, loans taken out today are repaid in money at some time in the foreseeable future. Both the US dollar and the euro have been widely accepted standards for settling international debts.

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