Question

How might a nations endowment of natural resources,labor, and climate shape the nature of its comparative advantage?

Answer 1

A Nation has a comparative advantage when it can produce any good or a service at a lower opportunity cost than other countries or in other words, it can produce those goods more efficiently than other countries.

A nations endowment of natural resources, labor and climate can shape the nature of its comparative advantage in the following way:

(i) If the country is rich in natural resources than other countries such as in oil, wood, etc then it would have a larger comparative advantage in producing goods made out of natural resources. For example, a country which has large areas of forests with good quality wood can produce furnitures and trade with other countries where wood is less available.

(ii)If a country has greater population than other countries, that country can easily produce more labor intensive products which require more labor to produce goods and services at very cheap wages than the countries where there is less labor. This is what happens in the US, since the population is lower than the developing countries like India, they outsource their work to these countries where the same work gets done at 1/4th or 1/5th price.

(iii) If a country has a hot climate then it can produce goods more cheaply which can be easily produced in the hot climate and also if a country has a cool climate then it can produce goods more cheaply which can be easily produced in the cold climate. Let's take the example of say fruits. Fruits such as mangoes can be produced in hot areas more easily so they are cheaper there. On the other hand, fruits such as apples can be produced in cold areas more easily so they are cheaper there.

This is how we know that a nations endowment of natural resources, labor and climate can shape the nature of its comparative advantage.