Unit 11.2 Growing the Economy Topic 3: Specialisation of ...lib.oup.com.au/general/PNG/UpperSecondary/9780195578751-Eco11… · In PNG, highland coffee, Rabaul mangos, Kainantu pottery

Unit 11.2 Growing the EconomyTopic 3: Specialisation of production resources

Having explained the relationship between inputs and outputs, costs and benefits of production and production variables, Topic 3 focuses on specialisation of production resources. In this topic you will learn about the different forms of specialisation and its advantages and disadvantages, and how it affects productivity in the PNG economy. When you complete this topic you should be able to explain:• The concept of specialisation.• Different forms of specialisation.• The advantages and disadvantages of specialisation.• Productivity trends in PNG.

SpecialisationIn undeveloped societies people produced almost everything for themselves. Individuals performed many economic activities such as hunting, fishing, farming and making hulls, bows and arrows, and pottery. They were self-sufficient. These societies gradually disappeared once people started to concentrate on producing one or two selected products. This specialisation and growing dependence on agriculture rather than hunting enabled people to produce not only for themselves but for others as well. This system paved the way for exchange economies. With the evolution and wider use of money, people produced goods and exchanged them rather than bartered. Individuals may produce one or two things but they consume many more. This also led to the situation where everyone in an economy was dependent on another’s production. Eventually this extended to entire regions, making international trade possible.

Example In the task of weaving cloth, originally one member of the family would shear the sheep, others would wash the wool produced, card it, then spin it, another would dye it and finally the weaver would weave the wool into cloth, which could then be used to make clothing or other items (such as blankets or bags). The most time-consuming part of this process was the spinning. In many families the unmarried daughters were the ones who specialised in the spinning, which is why an unmarried woman was referred to as a spinster, although the act of spinning is no longer part of everyday life.

Division of labour and specialisation became so important for the economic well-being of communities that whole families took their names from the specialist tasks they performed, such as Potter, Farmer, Shepherd, Glover, Carpenter, Baker, Cook, Fisher and from tasks that are now obsolete such as Cooper (a barrel maker), Fletcher (a person who put the feathers on the end of arrows) and Fuller (the person who stamped woollen cloth in water to felt it and make it warmer to wear).

In present-day employment people tend to perform a single task only. They specialise in their respective tasks. Doctors, lawyers, accountants, bricklayers and painters are examples of this. Also, land is designated for a specific industry, either for vegetable or fruit growing. Coffee is grown in the highlands and coconuts in Rabaul, Buka and Madang. Machines are made to perform many tasks simultaneously. The conveyer system of an auto assembly line is an example. Firms are also engaged in specialised products only. A few local examples include: SP Brewery – beer, British American Tobacco – cigarettes, and Ramu Agri Industries – sugar

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104 Unit 11.2 Growing the Economy

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and oil palm. Toyota, Sony, LG and Coca-Cola are international examples. Some countries also specialise in certain types of production: Japan – electronic goods and motor vehicles, Sri Lanka – tea, and the US – wheat.

Specialisation means concentrating on a particular product or task. When workers specialise, the efficiency and quality of production tends to improve. As a result, more goods are available for the society. People are better off. This means a better standard of living, better hospitals and schools. In modern economies production is carried out through the application of this principle. It could operate at various levels. These include:

• Individual (labour).• Organisational.• Regional.• International.

Individual (labour) specialisationIndividual specialisation relates to labour. It is referred to as labour specialisation, which occurs when one person does one part of a task repetitively and becomes good at what they do, and so can produce more. When a production process is broken up into several tasks, each of which is performed by one worker or group of workers, this is called division of labour.

Adam Smith1 illustrated the division of labour with an example. A worker, all alone, can make just 20 pins a day – each worker in the pin factory is involved in drawing wires, straightening, cutting, pointing, grinding and so on. Smith noted that workers moved from one place to another to perform their tasks, wasting lot of time. He asserted that ten workers could produce 48 000 pins per day if each of eighteen specialised tasks were assigned to particular workers, increasing average productivity by 4800 pins per worker per day. This revolutionary idea applied by producers saw a tremendous increase in productivity. Division of labour and specialisation meant greater output at a lower per unit cost.

Labour specialisation comes in two forms.

• Job specialisation – individuals specialise in one particular job rather than doing several. For instance, a medical doctor may specialise in gynaecology, dentistry or community medicine. A university lecturer may specialise in economics only. An engineer may specialise in road construction.

• Process specialisation – this occurs when the production process is broken down to distinctive tasks and each worker is expected to perform a single task. In an auto assembly line, a worker may be involved in fixing left-hand side doors only. In a textile factory, workers specialise in fixing buttons, stitching a collar or fixing the pocket of a shirt.

1 Adam Smith is considered the father of economics. Economics emerged as a discipline with the publication of his book An Inquiry into the Nature and Causes of the Wealth of Nations in 1776. It is commonly referred to as The Wealth of Nations.

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105Topic 3: Specialisation of production resources


Division of Labour

Specialisation

Surplus is created

Exchange takes place

Let’s look at the advantages and disadvantages of labour specialisation (or the division of labour).

Labour specialisation - advantages1. Increased labour productivity – by doing only one job, each worker becomes very good

and quick at what they do. As a result, the number of units produced during a particular period will increase.

2. Time savings – the division of labour stops workers from moving from one point to another. This will save time and more items can be produced during a set time.

3. Facilitated automation of production processes – this can be done when the division of labour is introduced. Accordingly, machinery and conveyer systems can be designed to suit specific production processes.

4. Innovations and quality improvements – when concentrating on a single task repetitively, workers can come up with new methods. This encourages quality improvement and innovation.

5. Economical use of machinery and tools – in a fabrication workshop it is necessary to supply lathe machines, welding machines, grinders and other facilities. When division of labour is practised in this instance, these machines and tools can be used more efficiently as each work task is defined, which means less time wasted due to inefficiency.

6. Retention of workers – because of the specialised nature of tasks that workers perform, it is easy to retain workers in the same firm because of their involvement.

Labour specialisation - disadvantages1. Worker frustration – repetitive and monotonous work leads to boredom that finally

discourages workers to perform the job satisfactorily.2. Standardisation of products – with the introduction of automated production processes,

products are built according to technical standards and specifications. This can limit market sales, as, for example, in Australia the new iPad does not have access to the 4G mobile network. As a result, the company has been forced to give refunds to customers.

3. Difficulty in replacing workers – because of the specialised nature of some tasks it is not always easy to replace workers in cases of resignation, death or illness.

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4. Interdependency of tasks – each task is dependent on the next task when division of labour is applied. Slowness or absenteeism will affect the production line. This is true when a new worker who needs to learn on the job is introduced to the production line.

5. Poor labour mobility – it may be difficult for workers to find new jobs should they leave a firm. If workers who only fixed car suspensions in an assembly line have to search for new jobs they have to either retrain or look for the same type of job.

6. Limited knowledge, skills – since workers performs a single task for long periods of time their knowledge and skills are limited to a very narrow field of work.

7. Loss of pride – workers often claim that the work they do is the result of their expertise. This is true in creative work such as murals or finely crafted furniture. In mass production this sense of pride and satisfaction is much harder to establish because of the repetitiveness and lack of involvement in the task.

Organisational specialisationSpecialisation occurs when organisations concentrate their production on one or two products. Examples in PNG include SP Brewery, Paradise Foods and Monier Ltd. Specialist organisations need to recruit and train workers to perform in their workplaces. They budget for research and development to improve their products and production processes. Larger companies such as Coca-Cola will install automated production processes, establish sales and marketing networks, and produce standard products in large quantities. If specialisation is successful, an organisation will be able to improve its productivity and reduce the cost of production per unit. This allows the company to compete more successfully in the market and hopefully to become a market leader.

Unit 11.2 Activity 3A: Division of labour and specialisation1. House building is an industry that relies on the division of labour. List five specialised jobs

needed in this industry.2. Select a factory in your area and list how the division of labour is organised in its

workplace.3. Think of an example of a specialist business in PNG. State some of the jobs required in the

firm’s production processes. State the qualifications and skills the workers would require to perform their jobs.

Regional specialisationWhen a particular region or a geographic area concentrates on the production of a product or two, this is known as regional specialisation. In PNG, highland coffee, Rabaul mangos, Kainantu pottery and Madang coconuts are examples. Regional specialisation may occur as a result of soil fertility, climate, availability of certain inputs and special facilities. It allows mass production to occur while minimising costs. This will allow producers to compete in their respective markets and to promote their region for the quality of its produce.

International specialisationInternational specialisation occurs when a country produces a unique product. A country may have secret or traditional production processes, rich soils, excellent climate and a wealth of resources. Greek yoghurt, Danish dairy products, French wine, Korean Kimchi, Kuwaiti oil and Sri Lankan tea are a few examples of international specialisation. The main criterion is the comparative cost advantage that some countries have over others. Therefore, international specialisation can be achieved when a product is produced at its lowest cost.

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Unit 11.2 Activity 3B: Regional and international specialisation1. List examples of regional specialisation in the Province where you live.2. List examples of PNG international specialisation.

ProductivityProductivity is the ratio of input to output. It indicates the level of output that can be obtained from a unit of input. It can be expressed in different ways:

• Output per labour hour.• Output per unit of raw material.• Yield per hectare.• Output per machine hour.Productivity is used for comparison purposes. It can be used to compare the output or production levels of similar organisations in an industry and for international comparisons as well. For example, two brick manufacturing companies in the same area could compare the number of bricks produced per cement bag, or two countries, such as PNG and Fiji, in the same region could compare the quantity of sugar canes harvested per labour hour. It is also possible to compare productivity within the same organisation in two different periods of time or between two different departments.

Productivity is a key factor that determines cost per unit and competitiveness. The secret of emerging economies is that of productivity improvement. In technical terms this means using less input to produce a given level of output or more output per unit of input. Investing in more up-to-date and efficient machinery that relies on less power will help reduced inputs.

Labour productivity, which indicates output per labour hour, is an indicator that measures labour efficiency. It is one of the important productivity indicators. It can be calculated at the company, industry and national level. As we have seen earlier (page 103) greater specialisation is an important way to improve worker productivity.

When output increases, this can be seen as a productivity improvement. The advantages of productivity improvements include:

• Increased profits.• Lower costs of production.• Improved market competitiveness.• Increased production.Total Factor Productivity (TFP) is another measure of productivity. It is usually defined as the ratio of total output to total inputs in a production process. In other words, TFP measures the average product of all inputs.

When measuring the productivity of a country the following indicators are used:

• Labour.• TFP.• Capital.

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Unit 11.2 Activity 3C: Productivity1. Define productivity. List some ways that a study of productivity can be used to improve the

efficiency of a small firm in your Province.2. Research PNG’s productivity and compare it against one of our neighbours using

employment rates and size of GDP growth.

Productivity in Papua New GuineaThe non-availability of reliable data or recent studies is the main limitation to understanding the productivity trends in PNG. The following statements, which were extracted from research reports, provide useful insights although none of them were taken from recent studies.

The dramatic story is the comparison of productivity growth for [the] formal economy prior to independence approaching 8 percent a year, with productivity growth after independence approaching zero and falling, and in the most recent years, about one percent. (Source: Wages, Incomes and Productivity in PNG, P.A. McGavin, Institute of National Affairs, 1991)

Estimate of total factor productivity shows recent deterioration in two-factor productivity growth for the formal economy. (Source: Labour Resource Utilization in Melanesia, P.A. McGavin, Australian National University, 2001)

The analysis shows that swings in growth during 1975–2004 are mostly accounted for by changes in capital input and lower Total Factor Productivity growth. (Source: Growth and Productivity in Papua New Guinea, Ebrima Faal, IMF, 2006)

From 1976 to 2004, after independence, real GDP growth slowed to 2.3 percent a year on average. Most of the decline in output growth is explained by a significant slowdown in growth of capital input and to a lesser extent by lower Total Factor Productivity growth. (Source: Growth and Productivity in Papua New Guinea, Ebrima Faal, IMF, 2006)

On average, no productivity improvements have been achieved since independence. (Source: Growth and Productivity in Papua New Guinea, Ebrima Faal, IMF, 2006)

… low smallholder productivity and high cost of production and marketing have jeopardised the international competitiveness of many of PNG’s agricultural tradables, despite excellent agro-ecological conditions for their profitable cultivation. (Source: Papua New Guinea Accelerating Agricultural Growth: An Action Plan, World Bank, 1997)

During the sub-period 1974–2002, the estimated annual rate of increase in labour productivity fell to 0.24% … (Source: Agricultural Productivity Change in Pacific Island Countries, Euan Fleming, Pacific Economic Bulletin, Vol. 22 Number 3, 2007, The Australian National University)

From the above statements, it can be seen that productivity trends in PNG are not satisfactory. The government has not paid attention to productivity improvement and there has not been sufficient investment to improve it. Low productivity has serious consequences for sustainable economic growth. According to these studies, the high cost of labour relative to productivity is one of the factors that hinder the expansion of manufacturing in PNG. The phrase ‘high cost of labour relative to productivity’ means a low labour input-output ratio.

The graph below is one attempt to measure productivity in PNG for the period 1968–2004:

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Productivity in PNG, 1968–2004 (using a method called Total Factor Productivity).

1968

20

15

10

5

0

–5

–10

–151972 1976 1980 1984 1988 1992 1996 2000 2004

The graph has been adjusted to eliminate the peaks and troughs of business activity in particular years – it’s the overall trend that is important. (Source: adapted from Growth and

Productivity in Papua New Guinea, Ebrima Faal, IMF, 2006). Research productivity in the period since 2004. Is there an improvement in productivity?

The sources of productivity growth are:

• Increased utilisation of existing resources.• Technological advancement.• Physical capital investment.• Human capital investment.• Entrepreneurship and management.• Good governance and economic stability.However, the World Bank, in its ‘Papua New Guinea Overview’ has a more positive picture of PNG. It describes the PNG economy as two-edged, with one sector focused on the large-scale export of natural resources and the other on subsistence and semi-subsistence production in the hands of the majority rural population. However, a new sector is emerging: a non-mineral small and medium-sized business sector. (http://www.worldbank.org/en/country/png/overview)

The World Bank also noted recent strong macroeconomic management and large new investments, which ensured the longest uninterrupted period of economic growth since independence. There were large falls in world prices for PNG’s exports a major shock to export prices, but the PNG economy slowed moderately in 2009 with a 5.5% expansion. It had a close to 7% growth in 2010 (with 9% growth expected in 2011).

Investments have been important, with the US$15 billion PNG-LNG investment project the most notable. Other investments in communications, construction and real estate, for example, have had benefits in other sectors, helping growth in formal employment and creating a shortage of skilled labour.

Recent structural reform has opened markets in telecommunications and air transport, with major welfare gains for the population. The World Bank noted that PNG faced challenges such as:

• Maintaining law and order.• Improving the business climate.• Commercialising state-owned enterprises.

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• Reducing the regulatory and licensing burden.• Equitably accessing resources (including land) for development.Developing infrastructure – electricity, telecommunications, road and other transport – were essential for quicker private sector-led growth.

According to the World Bank, translating strong macroeconomic performance and extractive industry revenues into a broad improvement in living standards is PNG’s key challenge. And, to conclude, to improve service delivery four points were identified:

• Public financial management integrity.• Sector spending efficiency.• Improved civil service performance.• Transparency and accountability in budget management to convert forthcoming revenue.

Unit 11.2 Activity 3D: Productivity in PNG1. We have looked at two very different accounts of PNG’s economy, one more critical and

the other far more positive. Which version do you agree most with? Give reasons for your answer.

2. Identify some of the strong growth areas in the PNG economy and some of the structural weaknesses identified in the above assessments?

Summary1. The economic resources used in production are referred to as factors of production. There

are four types.

• Land.• Labour.• Capital.• Entrepreneurship.These are also known as production inputs.

2. The owners supply factors of production for production of goods and services and receive rewards. These rewards are rent for land, wages for labour, interest for capital and profit for entrepreneurship.

3. Ninety-seven per cent of land resources in PNG are owned by customary landowners. The land tenure system plays a vital role in economic development.

4. The stock of national wealth basically consists of natural resources, produced resources and intangible resources. National wealth accumulates through economic activities.

5. The output of production processes are goods and services. Goods include consumer goods and capital goods.

6. The costs incurred in production are classified as private costs and external costs. The sum of these two cost elements is referred to as the social cost.

7. The benefits from production are classified as private benefits and external benefits. The sum of these two elements is called social benefits.

8. Another way of classifying costs is fixed cost, variable cost, total cost, average cost and marginal cost. The behaviour of these cost elements are important in economic decision-making.

9. Production variables include fixed factors and variable factors. Fixed factors are the factors that cannot be changed in the short run. In the long run all factors are variable.

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10. Economies of scale refers to the relationship between proportionate change in output and proportionate change in input. Increase of returns to scale is called economies of scale, while diminishing returns to scale is called diseconomies of scale.

11. Specialisation means concentrating on a particular product or task. When individuals specialise in performing a particular task, this is called labour specialisation. Labour specialisation is a result of the division of labour. The division of labour occurs when the production process is broken into several tasks, each of which is performed by one worker or group of workers.

12. Productivity is the input–output ratio. Productivity growth indicates the increase of output units using the same quantity of input units. Productivity growth improves the ability to compete in the market. It is also a source of economic growth.

13. According to available studies, PNG’s productivity growth is not satisfactory. Investment in productivity growth is vital for economic development in PNG.

Unit 11.2 Activity 3E: Multiple choice questionsIn each of the following questions select one of the alternatives that you consider as correct or most appropriate.1. In economics production means: A. The creation of any good or service the people are willing pay for. B. Doing an activity that is useful to the community. C. Providing inputs for production. D. Providing support services for production.2. Which of the following is not a factor of production? A. Land. B. Labour. C. Cash. D. Capital.3. Which of the following statements describes the nature of land as a resource? A. Resources provided by land are directly consumed by people to satisfy their wants. B. Land provides unlimited natural resources to the community. C. Land is sometimes considered as capital in an economic sense. D. Resources provided by land cannot be consumed in their original form.4. Which of the following describes the nature of labour? A. Labour cannot be separated from workers. B. Labour is an artificially made resource. C. Labour is the number of hours that workers are willing to provide for production. D. Labour is included as a factor of production when workers are well trained.5. Which of the following is not capital? A. Money. B. Machinery. C. Equipment. D. Factory building.

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6. Which of the following correctly describes capital? A. A business owner’s capital account balance. B. Goods produced to assist in future production. C. Goods produced to be used in the future. D. Anything that can be used in the production process.7. If, today, more resources are allocated for the production of capital goods A. More consumption goods will be available tomorrow. B. Less demand for capital goods. C. The level of consumption will increase. D. There will be less demand for consumer goods today.8. Which of the following distinguishes capital goods from consumer durables? A. They are imported from developed countries. B. They are produced for consumers’ use. C. They are used by producers. D. They are produced, incurring opportunity cost.9. Which of the following do not include resources from land? A. Fish from the ocean. B. Oil from the seabed. C. Timber from customary land. D. A home built on customary land.10. Combining production resources and arranging the production of goods and services is a

function of: A. A sole proprietor. B. A entrepreneur. C. A partnership. D. A company.11. Which of the following states the factors of production and corresponding rewards

correctly? Factor Reward A. Land Interest Labour Wages Capital Profit Entrepreneurship Income B. Land Royalties Labour Wages Capital Interest Entrepreneurship Profit C. Land Rent Labour Wages Capital Interest Entrepreneurship Profit

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D. Land Royalties Labour Wages Capital Interest Entrepreneurship Profit12. Which of the following factors should be considered when deciding appropriate levels of

capital? A. Affordability and suitability for the intended purpose. B. Cost and efficiency. C. Efficiency and productivity. D. Economy and efficiency.13. The four types of production inputs are: A. Raw materials, machinery, support services and labour. B. Land, labour, capital and entrepreneurship. C. Natural resources, renewable resources, non-renewable resources and artificially

made resources. D. Raw materials, labour, finished goods and works-in-progress.14. The types of output are classified as: A. Raw materials, capital goods and finished products. B. Goods, technical services and support services. C. Consumer durables, consumer goods and services. D. Consumer goods, capital goods and services.15. Which of the following is a private cost of production? A. An input cost incurred by the producer. B. A cost of production. C. A cost incurred by the society. D. Environment taxes paid by the producer.16. Which of the following is a social cost of production? A. Private benefit of production less external cost of production. B. Private cost of production plus external cost of production. C. Costs incurred by the society as a whole. D. Social benefit of production less external cost of production.17. Which of the following are externalities of production? A. Costs incurred by the society but generated by production activities. B. Costs incurred and benefits generated as a result of production. C. Negative and positive effects of production activities. D. Negative effects generated by the producers in market economies.18. Fixed costs do not include: A. Rent. B. Electricity. C. Contract staff salary. D. Depreciation of plant and machinery.

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19. In the short run, production can be increased by: A. Adding variable factors only. B. Adding both variable and fixed factors. C. Adding fixed factors only. D. Adding new plants and machinery.20. Which of the following correctly describes fixed costs? A. The costs that vary directly with the level of output.. B. The costs that do not vary directly with the level of output C. The costs that do not change both in the short run and long run. D. The cost of new plant and machinery.21. Which of the following statements is incorrect? A. Fixed cost is zero if production is zero. B. Total cost is the sum of fixed costs and variable costs. C. Fixed costs remain unchanged as output changes. D. Variable costs are zero if production is zero.22. Which of the following correctly describes marginal cost? A. Total cost divided by total output B. Addition to the total cost caused by producing one more unit of output. C. Total variable cost divided by total output. D. Total output divided by total cost.23. Which of the following correctly describes average cost? A. Fixed costs divided by total output. B. Total variable costs divided by total output. C. Total output divided by total cost. D. Total cost divided by total output.24. Which of the following occurs in a situation of diminishing marginal returns to labour? A. A fall in marginal product. B. A fall in total cost. C. A rise in marginal product. D. A rise in average cost.25. When a new computer manufacturing firm sets up in Silicon Valley, California, it benefits

from equipment suppliers, components suppliers, packaging material suppliers and other support services already established in that geographical area. This is an example of:

A. Technical and non-technical economies of scale. B. External economies of scale. C. Internal economies of scale. D. Technical economies of scale.26. When diminishing returns occur: A. The marginal physical product of a variable factor declines. B. The total output of a variable factor declines. C. The marginal product of a factor rises. D. The marginal product of a factor is constant.

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27. Which of the following correctly describes economies of scale? A. Increasing inputs by 60% leads to a 30% increase in output. B. Increasing inputs by 50% leads to a 50% increase in output. C. Increasing inputs by 25% leads to a 17% increase in output. D. Increasing inputs by 20% leads to a 50% increase in output.28. Which of the following costs always decline as output increases? A. Variable costs. B. Marginal costs. C. Average fixed costs. D. Fixed costs.29. Which of the following statements describes the term ‘short run’? A. A time period in which all resources are fixed. B. A time period in which the level of output is fixed. C. A time period in which the size of the production plant is variable. D. A time period in which some resources are fixed and others are variable.30. A firm has increased its inputs by 30% and finds that its output has increased by more than

30%. This is known as: A. Economies of scale. B. Diseconomies of scale. C. Constant returns to scale. D. Diminishing returns.

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Unit 11.2 Growing the Economy Topic 3: Specialisation of ...lib.oup.com.au/general/PNG/UpperSecondary/9780195578751-Eco11… · In PNG, highland coffee, Rabaul mangos, Kainantu pottery