Final answer:
Specialization through division of labor and trade exploit differences in productivity across workers. Specialization allows individuals and firms to focus on what they are most efficient at, leading to increased productivity and competition. Trade is necessary for specialization to be effective.
Step-by-step explanation:
Specialization through division of labor and trade exploit differences in productivity across workers. Specialization allows individuals and firms to focus on what they are most efficient at, leading to increased productivity and competition. Trade is necessary for specialization to be effective, as workers can use their income to purchase goods and services they need.
When different workers specialize in different tasks, they can take advantage of their comparative advantage, which means they can produce a certain good or service at a lower opportunity cost compared to others. This results in increased output and efficiency.
For example, in a factory, one worker may be more skilled at operating a machine while another worker may be better at assembling the final product. By specializing in their respective tasks and then trading their outputs, they can both benefit from higher productivity and efficiency.