Specification Coverage: This topic examines how
specialisation and division of labour increase productivity, their
impact on firms and international trade, and the functions of
money. Students should understand Adam Smith's contributions,
evaluate advantages/disadvantages, and analyze real-world
applications across different economic levels.
Adam Smith's Foundational Theory
Adam Smith (1723-1790), the
'father of Economics', revolutionized economic thought with
The Wealth of Nations (1776). His pin factory
observation demonstrated:
Historical Example: Smith documented that 10
specialised workers could produce 48,000 pins daily (4,800 per
worker) versus 20 pins by a single unspecialised worker – a
24,000% productivity increase.
Division of Labour |
Specialisation |
- Breaking production into discrete tasks
-
Example: Car assembly lines (Tesla's 6,000+
components)
-
Enables workers to focus on specific operations
|
- Concentrating on narrow skill sets
-
Example: Surgeons specialising in neurosurgery
- Leads to expertise development
|
Levels of Specialisation
Exam Technique: Use the acronym "IBRG" to
remember the 4 levels: Individual,
Business, Regional,
Global. Always provide contemporary examples
for top marks.
Level |
Definition |
Example |
Impact |
Individual |
Workers developing specific skills |
Amazon warehouse pickers |
UK labour productivity grew 2.3% (2021) |
Business |
Firms focusing on niche markets |
ASML (Dutch semiconductor equipment) |
Controls 90% of EUV lithography market |
Regional |
Geographic concentration |
Silicon Valley tech cluster |
Generates $275bn GDP annually |
Global |
National comparative advantage |
Bangladesh textiles ($42bn exports) |
85% of export earnings |
Advantages vs Disadvantages
In Production
Advantages |
Disadvantages |
-
Productivity: Toyota produces a car
every 57 seconds
-
Lower Costs: 32% reduction in unit
costs for mass producers
-
Global Markets: iPhone components
from 43 countries
|
-
Worker Motivation: 67% of factory
workers report monotony
-
Quality Issues: Boeing 737 MAX
production flaws
-
Structural Unemployment: UK steel
industry job losses
|
In Trade
Advantages |
Disadvantages |
-
Competitiveness: Germany's 7.5%
global export share
-
Economic Growth: China's 9.2%
annual GDP growth (2000-2010)
-
Consumer Choice: UK supermarkets
offer 30,000+ products
|
-
Dependency: Europe's €100bn energy
crisis (2022)
-
Resource Depletion: Chile's copper
reserves declining
-
Trade Imbalances: US $951bn trade
deficit (2022)
|
Key Evaluation
The benefits of specialisation depend on:
mobility of factors (UK's 56% occupational
mobility rate), demand elasticity (iPhone's
price inelasticity), and
government intervention (EU's €17bn Just
Transition Fund for displaced workers).
The Functions of Money
Money solves the
double coincidence of wants
problem inherent in barter systems (only 0.3% of modern
economies use barter).
Function |
Definition |
Example |
Modern Challenge |
Medium of Exchange |
Accepted payment method |
Contactless payments (UK: 90% of transactions) |
Crypto volatility (Bitcoin -45% in 2022) |
Measure of Value |
Common pricing standard |
Big Mac Index (PPP comparisons) |
Hyperinflation (Zimbabwe 2008: 79.6bn%) |
Store of Value |
Retains purchasing power |
UK savings accounts (average 3.5% interest) |
UK inflation eroded savings by 12% (2021-23) |
Deferred Payment |
Future transaction basis |
Mortgages (UK average £200,000 over 25yrs) |
Rising interest rates (BoE base rate 5.25%) |
Contemporary Issue: Digital currencies
challenge traditional money functions - Nigeria's eNaira
processes 700,000 transactions/month, but only 0.5% adoption
rate shows implementation difficulties.
Exam Preparation Toolkit
Recent Exam Questions:
-
"Evaluate the view that specialisation always leads to
improved economic outcomes" (Edexcel 2023, 25 marks)
-
"Analyse how the functions of money contribute to economic
efficiency" (Edexcel 2022, 20 marks)
-
"Assess the impact of the division of labour on businesses
and workers" (Edexcel 2021, 25 marks)
Advanced Evaluation Framework
When evaluating specialisation, consider:
Criterion |
Short-Term |
Long-Term |
Global Context |
Productivity |
Immediate 30-50% gains |
Diminishing returns set in |
Global value chains increase complexity |
Employment |
Job creation in export sectors |
Structural unemployment risks |
Offshoring impacts (UK lost 500k manufacturing jobs)
|
Innovation |
Process improvements |
May stifle radical innovation |
IP protection challenges (China counterfeit goods)
|
Examiner's Insight: In 2023, only 18% of
candidates could effectively evaluate specialisation using
current data. Top scripts referenced: Brexit's impact on UK
specialisation (automotive sector -29% output), AI's effect on
job specialisation (67% of jobs at risk), and post-COVID
reshoring trends (+12% US manufacturing).