Explain how benefits to the USA economy can arise from specialisation and exchange. [10]

This economics paper explains how the United States of America’s (USA) economy benefits from specialisation and exchange. 

A country has a comparative advantage in producing a good if it has a lower opportunity cost of producing that good as compared to another country. According to David Ricardo’s law of comparative advantage, the USA will specialise in the production of goods in which it has a comparative advantage in, and use it to trade for goods in which it has comparative disadvantage in. International trade refers to the exchange of goods and services across international boundaries. The theory of comparative advantage theorises that trade arises because different countries have different opportunity costs.

By specialising and exporting goods in which the USA has a comparative advantage in while conversely importing goods in which it has a comparative disadvantage in, she would be able to increase her overall consumption of goods and services as compared to the situation under autarky – defined as the situation without trade. Hence, USA citizens would be able to consume beyond their Production Possibilities Curve (PPC) as a result of increased consumption possibilities. According to ‘The World Factbook’, agriculture and services comprise 1.2 and 79.6 percent of USA’s gross domestic product (GDP) in 2014 respectively. Gross domestic product is defined as the total value of final goods and services produced in a country's domestic area over a given period of time, usually a year. A developed country with a strong technological and capital base such as the USA would have a comparative advantage in the production of high-tech and high-value services, such as banking and shipping. In turn for exporting these, it imports goods such as agriculture from other countries which have a comparative advantage in producing agriculture, such as land-abundant Thailand, or a labour-abundant country such as the People's Republic of China which would produce labour-intensive economic products.

Aside from higher consumption possibilities, there exists other benefits to the USA economy arising from international trade. International trade allows for the USA to produce for a larger world market, thus enabling economies of scale to be reaped. Economies of scale refer to the fall in Long Run Average Costs (LRAC) as output increases. Foreign competition also forces domestic producers to innovate, cut costs and improve product quality. A case in point would be the consumer electronics industry – where American multinational technology company Apple has had increased competition from foreign competitors such as rival Samsung. The exploitation of economies of scale and greater competition improves both productive and allocative efficiency, thereby enabling the USA to better utilise scarce resources in maximising its economic welfare.

Opening up to international trade helps the USA attract Foreign Direct Investment (FDI). FDI arguably results in not just technological transfer, but also the transmission of ideas, technical expertise, and managerial skills, all of which are important contributing factors to the USA’s long-run economic growth. According to ‘The World Factbook’, the USA is the largest recipient of Foreign Direct Investment (FDI) in the world, with a total of 2.8 trillion USD in 2013.

Besides attracting FDI, engaging in international trade also facilitates structural economic change. Developing an economic structure that supports the exporting of goods leads to the expansion of services such as shipping, air travel, banking and finance services. The economy would therefore mature and develop, becoming less dependent on manufacturing, diversifying into higher-value services. This is evident in the USA economy, where the industry sector only comprises 19.2 percent of USA’s GDP, as compared to the service sector which comprises 79.6 percent.

In conclusion, specialisation and international trade brings about many benefits to the USA economy, and are not limited to those listed above.

JC Economics Essays - This is a model H1/H2 A level Economics essay for a part (a) question of 10 marks. This economics response was kindly contributed by Wilson YWS, a former economics student, and (after editing by an experienced economics tutor) is generally quite well written, especially for a 10 mark question under examination conditions. We can look forward to more H1 economics or H2 economics essays from Wilson in the future. 

However, how can this economics essay be even better written? What other salient points should have gone into the construction of this essay, and what economics diagrams would have been drawn to give this economics essay an even better mark? Also, conversely, what did this economics student include that was good to have but not really necessary? Do always think through the essays that you write and seek to do better each and every time. 

Thank you for reading, and cheers. 

Explain how benefits to the UK economy can arise from exchanges, arising from specialisation, to address the central problem of economics. [10]

This paper explains the benefits to the UK (United Kingdom) economy of exchanges arising from the price mechanism, arising from specialisation, that addresses the central problem of economics.

First and foremost, the central problem of economics, according to Lord Lionel Robbins of the London School of Economics, is basically about humans having unlimited wants, but because of limited resources of the factors of production of land, labour, capital, and entrepreneurship, people cannot have everything that they want. This is the situation of scarcity necessitating rational choice, given finite resources on earth to meet unlimited wants. 

There are a few keywords and core concepts that we need to address before we start on our essay. Exchanges refer to the movement of goods and services in exchange for money, in a free market economy. Specialisation refers to the division of labour that occurs in a free market economy that uses the price mechanism. Specialisation means that individuals or firms produce one good, and can thus reap economies of scale from it, where economies of scale refer to falling long run average costs (LRAC) a the scale of output increases. The central problem of economics can basically be addressed through the price mechanism in a free market economy, which refers to the intersection of demand and supply, where, as Adam Smith famously said, prices act as an “invisible hand” coordinating the factors of production to allocate goods in the economy, solving the problems of "what" to produce, "how" to produce, and "for whom" to produce those very goods. This paper now explains the benefits to the UK economy of exchanges arising from specialisation.

First and foremost, the price mechanism and the concomitant specialisation that arises from it lead to efficiency in the UK market. There are many kinds of efficiency, but according to economic theory the price mechanism in a competitive market would be productive and allocative efficient, ceteris paribus. Productive efficiency means that the market produces at the lowest possible average price, while allocative efficiency means that the market produces also where P = MC, where MC means marginal costs. Alternatively, allocative efficiency can also be defined as where the market allocation is the socially optimal level for society, under conditions of no market failure. For example, if UK farmers specialised in the production of various crops  and then exchanged to get what they need for their daily needs, then the agricultural produce market would achieve productive and allocative efficiency, because UK farmers would produce at the bottom of their LRAC and thus achieve the Minimum Efficient Scale (MES), the lowest point of the LRAC. This would ultimately benefit UK consumers because of lower prices and greater output, the greatest benefits of productive and allocative efficiency.

At the same time, beyond microeconomics, this question also asks about the UK economy. For the larger economy, specialisation would lead to an economy that could exchange goods internationally. International trade is defined as the exchange of goods and services across international boundaries. If the UK specialises, for example, in the production of capital intensive goods, such as cars and technological products, and then trades with another country, say China which specialises in the production of labour intensive goods, such as clothing, then trade can take place, which could increase UK’s actual growth, as AD  = C + I + G + (X-M). This is basically the benefit of specialisation and exchange on the international stage, called comparative advantage, where one country specialises and produces a good it has a lower opportunity cost of producing, and then exchanges it for a good in which it has a comparative disadvantage in, which leads to a higher consumption possibilities. 

In conclusion, it can be argued that exchange and specialisation to solve the central problem of economics can benefit the UK economy in terms of promoting productive, allocative efficiencies, as well as international trade because of comparative advantage for the benefit of the UK's economic growth. 

JC Economics Essays - This excellent economics essay, written under examination conditions, was kindly contributed by S. S., who achieved an grade A for H2 Economics at the A level examinations and also a Merit for H3 Economics. He achieved a university place at the London School of Economics and received good recommendations and testimonials from his economics and civics tutors. Special thanks for the kind and useful contribution. What can we learn about writing good economics essays from this sharing? Thank you for reading, and cheers. 

Explain why trade occurs between Singapore and its trading partners. [10]

International trade refers to the exchange of goods and services across international boundaries. In this essay, I will be explaining why trade occurs between Singapore and its partners such as China, the United States, and other countries of the world.

The law of comparative advantage states that a country is able to enjoy higher consumption levels if it were to specialise in goods in which it has comparative advantage in, and trade the good for other goods in which it has a comparative disadvantage in. For mutually beneficial trade to occur, the terms of trade, which is the exchange rate of the 2 goods between Singapore and its trading partners, must lie within the relative opportunity costs of producing the goods of the 2 countries involved. This theory explains that trade arises because different countries have different opportunity costs of producing different goods. This is due to differences in supply conditions which arise because of differences in factor endowments, the relative abundance of the factors of production. Factors of production such as land, labour and capital are unevenly distributed across different countries. For instance, land abundant countries like Australia and the USA can produce land intensive products such as agriculture more cheaply than land scarce countries like Singapore. Labour abundant countries like India and China can produce labour intensive products such as clothing and footwear more cheaply than developed countries with higher labour costs like Singapore and the USA. Developed countries with a strong technological and capital base like Japan, Korea and Singapore have a comparative advantage in the production of ‘high-tech’ products such as computers, electronics and transportation equipments.

It is thus clear that Singapore’s economy is heavily dependent on trade. Not only are exports the main engine of growth, Singapore also imports inputs to produce these exports and imports most of its consumer goods like food, clothing, footwear, and households appliances. However, not all of Singapore’s imports are used for domestic consumption or as inputs for domestic production. Instead, many goods are imported into Singapore only to be re-exported out to the other countries. Such trans-shipment takes place because Singapore is a main shipping hub located strategically along the major shipping routes. One of the high volume of trans-shipments going through Singapore, the trade figures show the value of both Singapore’s imports and exports to be greater than her Gross Domestic Product (GDP). One way of measuring if a country has a comparative advantage in the production of a particular good is to look at the net export figures that are specific to that good. Singapore is a net exporter for chemicals and chemical products, machinery and transport equipment, hence suggesting a comparative advantage in these goods. Given that Singapore is a developed country, the specialization in such capital and technology intensive products seems to correspond to comparative advantage theory. Conversely, Singapore is a net importer of food, crude materials, animal and vegetable oils. Being a small but developed country, Singapore has expensive land. Hence, the lack of specialization in these land intensive products also seems to correspond to comparative advantage theory.

In conclusion, due to the nature of Singapore’s small and open economy, this makes it even more important for her to trade.

JC Economics Essays - This essay is a H1 A levels Economics essay on why trade occurs between Singapore and its trading partners, contributed and kindly shared by HH in April 2015. Special thanks to HH for her kind contribution. 

In this essay, the author's writing is clear, to the point, and explains economic theory alongside real world examples and the context that is required to answer the question. This paper is well crafted and thought through carefully, and deserves a high mark, especially if it is written under examination conditions in a real economics examination. 

How can you write clearly, accurately, and relevantly, addressing the requirements of the essay question? Thank you for reading and cheers! 

Explain whether Singapore’s trade patterns follow the outcomes as predicted by the economic theory of comparative advantage. [10]

This economics paper explains whether Singapore’s trade patterns follow the economic theory of comparative advantage, which is often called the "law" of comparative advantage, and, on the other hand, in which scenarios does comparative advantage fall short as an economic "law" in predicting Singapore’s trade patterns. 

First, what is the theory of comparative advantage? According to the famous economist David Ricardo, a country has a comparative advantage in producing a good if it has a lower opportunity cost of producing that good compared to another country. In this context, the opportunity cost of a good is the amount of another good forgone to produce an additional unit of the good. When countries specialise and trade according to comparative advantage, consumption possibilities for both countries rise.

Reflect: what diagram or diagrams would be useful in demonstrating this economic theory?

According to comparative advantage theory, developed countries tend to specialise in and export capital, technology, and skill-intensive products while developing countries tend to specialise in and export labour and land intensive products. Trade patterns will consist of inter-industry rather than intra-industry trade, which refers to trade between countries exporting and importing the same types of goods. The question is whether Singapore fulfils the predictions of this model in the real world context. First, let us consider Singapore’s real world exports. Singapore is a net exporter of chemical products, machinery, and transport equipment. Considering that Singapore is a developed economy, the specialisation in such capital and technology intensive products is in line with comparative advantage according to factor endowments, meaning that Singapore does export goods that are capital and technology intensive because of her comparative advantage. Furthermore, Singapore exports high-skilled labour-intensive services, for instance in the areas of Bio-Medical Research & Development and other high-technology that requires skilled labour, further providing proof that comparative advantage theory explains Singapore’s patterns of trade. 

Second, let us consider Singapore’s real world imports. Singapore is a net importer of non-oil products like food, beverages and tobacco and animal and vegetable oils. Considering that Singapore is a developed but small country, land and labour are expensive. Hence, the lack of specialisation in these land and labour intensive products is in line with comparative advantage, meaning that Singapore does import goods that are land and labour intensive because of her lack of these resources, because of her comparative disadvantage.

Third, in particular, Singapore has a large oil refining industry, largely based in Pulau Bukom and other offshore islands away from Singapore's mainland. In fact, Singapore imports crude oil to refine into oil-based products like diesel and petroleum. While much of the products are exported, some are for domestic use. This is the reason why Singapore is a net importer. While Singapore does not have any oil resources, it still has a comparative advantage in capital-intensive, high-tech, and high-skilled oil refining. Therefore, it would seem that, prima facie, comparative advantage theory does explain Singapore’s patterns of trade in the real world. 

However, on the other hand, there are several patterns that do not confirm to comparative advantage theory. As Singapore is a transhipments hub and is known to be a famous hub for entrepot trade, much its imports are re-exported out of Singapore, and often Singapore is only a temporary destination for goods meant for re-export. Such transhipment trade is not related to comparative advantage but more due to Singapore’s locational or geographical, positional advantage along major shipping routes. Furthermore, the existence of intra-industry trade, where countries with similar factors of production trade the same types of goods, for instance in electronics exports and electronics imports, suggests that comparative advantage is not a perfect theory. 

In conclusion, comparative advantage does explain some aspects of Singapore’s trade, but the real world context is far more complicated than theory suggests, and it is arguably the case that comparative advantage is far more likely to be a theory rather than an immutable economic law.

JC Economics Essays - This is a sample model economics essay on Singapore's trade patterns, on international trade, and on comparative advantage. This economics essay for H2 Economics at A level was co-written by two economics lecturers for a tutorial on international trade and globalisation. The essay was further edited and proofread by a Master's student who specialised in lecturing on international trade and globalisation at A levels. Perhaps, one could think about the various trade theories learnt. Think also about how this essay could be made more detailed, and how this essay can be improved. What else could the authors have done to make this an even better essay? Thanks for reading and cheers!