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What is 'Specialization'

Specialization is a method of production whereby an entity focuses on the production of a limited scope of goods to gain a greater degree of efficiency. Many countries, for example, specialize in producing the goods and services that are native to their part of the world, and they trade for other goods and services. This specialization is, therefore, the basis of global trade, as few countries have enough production capacity to be completely self-sustaining.

BREAKING DOWN 'Specialization'

Specialization is essentially an agreement within a community, an organization or a larger group where each of the members best suited for a specific activity assume responsibility for its successful execution. Specialization can occur on both the microeconomic level and the macroeconomic level.

Microeconomic Specialization

At the individual level, specialization usually comes in the form of career or labor specialization. Each member of an organization or economy, for example, has a unique set of talents, abilities, skills and interests that make her uniquely able to perform a set of tasks. Labor specialization exploits these unique talents and places people in areas where they perform the best, helping both the individual as well as the overall economy.

If, for example, a single individual excels at math but is not a proficient writer, it benefits both the individual and the community if she pursues a field that relies heavily on mathematics.

Using another example, specialization can even refer to the production capacity of an individual firm. When setting up a factory, an assembly line is organized to increase efficiency rather than producing the entire product at one production station.

Macroeconomic Specialization

Economies that realize specialization have a comparative advantage in the production of a good or service. A comparative advantage refers to the ability to produce a good or service at a lower marginal cost and opportunity cost than another good or service.

When an economy can specialize in production, it benefits from international trade. If, for example, a country can produce bananas at a lower cost than oranges, it can choose to specialize and dedicate all of its resources to the production of bananas, using some of them to trade for oranges.

Specialization also occurs within a country's borders, as is the case with the United States. For example, citrus goods grow better in the warmer climate of the South and West, many grain products come from the farms of the Midwest, and maple syrup comes from the maple trees of New England. All of these areas focus on the production of these specific goods, and they trade or purchase other goods.

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