A dependency cost is a risk or loss that arises because an economy, firm or worker relies heavily on one product, market or supplier. In papers it appears in “evaluate” and “discuss” questions after a data set about specialisation.
This lesson follows the productivity gain from specialisation and belongs to specialisation and allocation.
How do I find a dependency cost in a question?
Look for three clues in the stimulus: one product making up a large share of income or jobs, one buyer or one supplier, and a price or supply that can change. Then ask what happens if that one thing weakens.
Write the chain in order: dependence, then change, then effect on income or jobs, then effect on the wider economy.
Worked example
The fictional country of Selatan Bay specialises in tuna. Its export income is 800 million tala a year, and 80% of that comes from tuna. Its import bill for rice, fuel and medicines is 500 million tala.
Step 1, tuna income. 80% of 800 = 640 million tala. All other exports bring 160 million.
Step 2, a fall in the world price. Suppose the tuna price drops by 25% while the catch stays the same. Tuna income becomes 640 × 0.75 = 480 million tala.
Step 3, new export income. 480 + 160 = 640 million tala, down from 800 million. That is a fall of 160 million, which is 20% of the original total.
Step 4, compare with the import bill. Before, income exceeded imports by 800 − 500 = 300 million. Afterwards, the gap is 640 − 500 = 140 million.
Step 5, write the evaluation. “Selatan Bay depends on one export. When the world price of tuna falls by 25%, total export income falls by 20% and the surplus over the import bill shrinks from 300 million to 140 million. A more varied export base would reduce this risk.”
What mistake do students make?
Students often write a general warning such as “specialisation is risky” with no link to numbers.
Mistaken answer: Specialisation is risky because things can go wrong.
This is true but earns little. It names no cause, no figure and no consequence.
The correction is to use the data: name the share, the change and the effect on income.
Check yourself
1. A fictional town has 3,000 jobs. 2,100 are in one factory. What percentage of jobs depends on that factory?
Show answer
2,100 ÷ 3,000 × 100 = 70%.
2. A tourist island earns 50 million tala a year, nearly all from visitors. Visitor numbers fall by 20%. Assuming spending per visitor is unchanged, what is the new income?
Show answer
50 × 0.80 = 40 million tala, a fall of 10 million.
3. Name one way an economy could reduce its dependency cost.
Show answer
It could develop a second export product or sell to more than one trading partner, so income does not rely on a single source.
Where does this lead next?
Now you can write both sides of a specialisation question. Next, distinguish market allocation from a price control scenario. When you want to rehearse the percentage steps above, the percentage-base explorer shows the base at each stage.
Evaluation is the skill that students find hardest to self-assess, and our teachers can read your answers closely in online one-to-one Economics tuition.