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What Is Economic Specialization?
Specialization is the process wherein a company or individual decides to focus their labor on a specific type of production. In layman’s terms, specialization means focusing on a specific job. When an individual specializes, they limit their focus to one specific activity. When a company specializes, it focuses on a narrow range of goods or services.
Adam Smith, one of the pioneers of economic analysis and modern economic thought, wrote about specialization in his seminal work, The Wealth of Nations. Smith argued that specialization within the labor force was one of the primary contributors to increased productivity.
What Are the Different Types of Economic Specialization?
Specialization is an important concept within both microeconomics and macroeconomics, but there are fundamental differences between how the two economic studies understand specialization.
- Microeconomic specialization. This refers to an individual’s specialization within the workforce, i.e. a person’s chosen profession is their area of specialization. Generally speaking, economic forces and competition dictate that people within the labor force choose areas of specialization that are well-suited to their talents. Within an organization or company, efficiency dictates that individuals be assigned specific tasks that capitalize on their skill sets and avoid redundancy. For example, on an assembly line, it is more efficient to assign each employee a specific task that they perform each day rather than train them on every task and have them rotate tasks every day. Individual specialization in a company produces a higher-quality final product and gives the company a competitive advantage over less-efficient competitors.
- Macroeconomic specialization. International trade largely dictates specialization at the macroeconomic level. Just as individuals or companies will specialize to fit a market niche, countries often specialize in a particular area to fulfill a global need giving them a comparative advantage over international trade competitors. For example, a country may specialize in producing semiconductors, essential components to electronics. That country is potentially able to make semiconductors at a higher quantity, higher quality, and cheaper than countries that do not have the supply chains and developed business infrastructure to produce semiconductors.
What Are the Impacts and Benefits of Specialization?
In Wealth of Nations, Adam Smith argued that specialization and division of labor were two of the primary contributors to economic growth and economic efficiency. Smith laid out several benefits of specialization.
His original analysis has been built upon by modern economists who still see specialization as a vitally important part of economic growth. Some of the important impacts and benefits of specialization include:
- Increased output. When companies and individuals within a country focus on a specific task, overall output, and production increases. For example, if many different cell phone companies make every single part they require, it slows down their production. Specialization means that in our global economy we have many different companies making specific parts that are then acquired by other companies to assemble their products, like cell phones. Specialization leads to a much more efficient supply chain and opens up greater production possibilities. Individual companies are able to produce specific cell phone parts at a lower opportunity cost than if one company were to build up the infrastructure required to manufacture every single part themselves.
- Cheaper products. If different companies specialize in making one product or one component of a product, they are able to also work to reduce production costs by producing at a larger scale and selling more units at a lower profit margin.
- Absolute advantage. Absolute advantage is an economic concept that holds that specialization is beneficial even if one individual or company is highly capable of engaging in multiple production models. Let’s think about a pin factory for an example. The owner of the pin factory may be highly capable of managing the larger financial decision-making of the company, running the human resources department and working on the assembly line to actually manufacture the pins. They might in fact be better at all of these jobs than the employees they hire. It would, however, be very misguided for them to attempt to do all these jobs. Their skillset dictates that they are much better than any of their employees at managing the company, therefore the company capitalizes on its absolute advantage by hiring workers (who may be individually less efficient at their jobs than the owner) to specialize and handle the individual jobs within the company. Learn more about absolute advantage here.
What Are the Disadvantages of Economic Specialization?
There are a number of disadvantages to economic specialization.
- Loss in demand. If a country or company specializes in making one product, they are dependant upon the market’s demand for that product. For example, some states in the U.S. specialized in coal mining, which was lucrative when coal was the main source of energy for the country. As the power providers have shifted away from coal to other forms of energy production, the demand for coal has gone down, leaving regions that relied on coal with high levels of unemployment and poverty.
- Political vulnerability. Some countries may become dependant on another country that is specialized in producing one specific good that is in high demand. This can make those other countries politically vulnerable. For example, Qatar is a small country with a highly specialized economy, with huge natural gas reserves, making other countries are dependant upon Qatar for natural gas.
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