Specialisation
Economics is about the production, distribution and consumption of goods. A key decision facing workers, firms and nations is what goods to produce. The economic concept of specialization helps answer this question. Under specialization, economic actors concentrate their skills on tasks at which they are the most skilled. Specialization has both micro- and macroeconomic applications.
Identification
- Specialization in an economic sense refers to individuals and organizations focusing on the limited range of production tasks they perform best. This specialization requires workers to give up performing other tasks at which they are not as skilled, leaving those jobs to others who are better suited for them. An assembly line, where individual workers perform specific tasks in the production process, is the best example of specialization.
Specialization is related to another economic concept, division of labor, discussed at great length by Adam Smith, the 18th-century Scottish economist and author of "The Wealth of Nations." Smith famously illustrated the benefits of specialization and a division of labor when describing a pin factory, in which each worker performs a single specialized task. One worker measures wire, another cuts it, one points it, others make the head and so on. Through this process, workers produced thousands more pins than if each worker made whole pins independently.
- Specialization, as illustrated by Adam Smith's example of the pin factory, allows workers to develop more skill in their specific tasks. Specialization increases output because workers do not lose time shifting among different tasks. Smith also believed that workers with specialties were more likely to innovate, to create tools or machinery to make their tasks even more efficient.
- The benefits of specialization extend beyond individual workers as well. Firms that specialize in their particular products can produce larger quantities to sell. Those firms and their employees use the proceeds from the sale of those goods to buy needed goods produced by other workers and companies.
- While Adam Smith saw the advantages of specialization and division of labor, he was no Pollyanna about these ideas. He saw a downside to them as well. He feared that monotonous assembly lines in which workers performed single tasks throughout the day could sap their creativity and spirit. He saw education as a remedy and believed that education fostered creativity and innovation in workers.
Karl Marx seized on Smith's concerns in his writings on economics. He saw monotonous production tasks, coupled with subsistence wages that do not represent the full value of labor, as factors that increase worker alienation, eventually resulting in a worker-led uprising against the capitalist class.
- Specialization in economics is not limited to individuals and firms, the realm of microeconomics. It also has applications in macroeconomics, which studies the economic actions of nations, regions and entire economies. In a macroeconomic context, specialization means that nations concentrate on producing the goods in which they have the most advantage while engaging in trade with other countries to obtain other goods.
David Ricardo, another classical economist of the 18th and early 19th centuries, argued for specialization based on comparative advantage, which helps determine whether it is more beneficial to domestically produce a good or import it. Suppose, for example, that the United States produces clothing and computers more cheaply than India. While the United States would appear to have an absolute advantage, it may not have a comparative advantage, which measures the ability to produce in terms of opportunity cost.
Because resources of production are limited, the opportunity cost of producing computers means fewer clothes are made. Compared to what has to be sacrificed, the country should specialize in producing the good in which it has a comparative advantage, while importing the other product.
Exchange Rate
What is it?
Benefits of a Strong Currency:
- The price of one’s currency in terms of another currency:
- USD1 = HKD7.8 means that USD1 can buy HKD7.8.
- This is what determines exchange rate in a free-floating exchange rate system:
- When a currency has strong demand it will appreciate in value.
- In contrast, when there is a large scale selling of a currency it will depreciate.
- Exports of goods and services.
- When foreigners purchase your goods and services they will need to use your currency.
- Thus they demand your currency.
- Inflows of direct investment.
- To invest in your nation investors need your nation’s currency.
- Inflows of portfolio investment.
- To invest in your nation investors need your nation’s currency.
- Pure speculative demand.
- Speculators often purchase currencies that they think will appreciate in value against their own currency.
- Official buying of the currency by the central bank.
- This might be done for investment or speculation or security or other reasons.
- Comparatively higher domestic interest rate.
- Thus savers will be likely to convert their own money into your currency to save in your nation and enjoy the comparatively higher domestic interest rates you offer.
- Imports of goods and services.
- Outflows of direct investment.
- Outflows of portfolio investment.
- Speculative selling of the currency.
- Official selling of the currency by the central bank.
- Rate of interest abroad.
- Appreciation means that the value of the currency in terms of another goes up:
- If the USD has appreciated against the RMB then it will take more RMB to buy one USD.
- If interest rates increases:
- Foreigners will tend to save money in one’s nation.
- Thus the demand for one’s currency rises which can cause one’s currency to appreciate value.
- Foreigners will tend to save money in one’s nation.
- Depreciation means that the value of the currency in terms of another currency goes down:
- If the USD depreciates against the RMB then it will take fewer RMB to buy each USD.
- Imagine:
- If 1 Euro was worth HKD 10.2 at the start of the year.
- It may depreciate if the Greek government declared that it would withdraw from the Eurozone and go back to using the Drachma in order to depreciate their currency.
- This will cause others to lose confidence in the Euro and speculation will cause people to sell the Euro.
- This may end up causing the Euro to depreciate to HKD 7 per Euro.
- In this case the Euro has depreciated against the HKD because it now takes more Euros to purchase each HKD.
- But the HKD has appreciated against the Euro because it now takes fewer HKD to purchase each Euro.
- Percentage appreciation/depreciation:
- A negative value indicates depreciation and vice versa.
Benefits of a Strong Currency:
- Lower import prices – This boosts living standards of consumers.
- An increase in the real purchasing power of HK residents traveling overseas for business and leisure purposes.
- Cheaper to import raw materials, components and capital inputs – causes an outward shift in short-run aggregate supply.
- Improvement in the terms of trade (lower import prices).
- Helps to control inflation – Domestic producers face stiff international competition and must keep their prices down. Lower inflation allows the MPC/HKMA to keep nominal interest rates at a lower level than if the exchange rate was weak.
- An increase in a country’s relative position in international league tables showing real GDP per capita when expressed in a common currency:
- Even if one’s GDP, as measured in one’s own currency, is no more than previously, because one’s currency has appreciated in value, the GDP of one’s nation will also increase when it is translated into another currency.
- Cheaper imports lead to rising import penetration and large trade deficit:
- Import penetration means that a larger portion of the goods and services provided by a nation’s firms is now provided by foreign firms.
- Exporters also lose price competitiveness and market share thus causing a trade deficit.
- Damaged profit and employment in some sectors to which exporting is the key means of generating revenue.
- Negative impact on economic growth (exports – injections of aggregate demand, imports – leakages of wealth form the circular flow of income).
- Some regions which have a higher than average dependency on exporting industries are more affected than others.
Qualities of Good MoneyFollowing are the qualities of good money:
General acceptanceThe essential quality of good money is that it should be acceptable to all, without any hesitation in the exchange for goods and services.
PortabilityIt is also an important quality of good money that is should be easily transferable from one place to another for doing business and making payment. The paper money is easier to carry because it has minimum possible wait than metallic money.
StorabilityMoney should be storable and it should not be depreciate with time. If the money used is perishable it will lose its value in few days. Paper money has this quality of storability.
DivisibilityGood money is that which could be divided into small units without losing any value.
DurabilityMoney should be durable. It should not lose its value with the passage of time. The gold and silver coins do not wear out quickly and quality of money remains the same.
EconomyIt is important quality of good money that it should be made economically. If there is heavy cost on issuing more money that is not good money. Good money is that has low cost and more supply. Paper money has this quality of economy.