Question

1. What does it mean if a country can produce something at a lower opportunity cost, and why would that be considered as a comparative advantage?

2. What is splitting up the value chain?

Answer 1

1.

When a country claims to produce something at a lower opportunity cost, then it means that the country is relatively sacrificing lower amount of other goods, when compared with the another country. It makes the country to become more efficient in a way that they produce one type of goods with lesser sacrifices or lower opportunity foregone, than the another country. It can be understood by the following example.

Country	Cars (units)	Bikes (units)
A	4	8
B	6	18

As per the above tabular data,

For country A, opportunity cost of producing cars = 8/4 = 2 unit of bikes

For country B, opportunity cost of producing cars = 18/6 = 3 units of bikes

Now, above calculation shows that country A produced car by only foregoing 2 bikes, but country B produced cars by foregoing 3 bikes. It means that country A has lower opportunity cost of producing cars as it incurs less foregoing of other goods.

It would be considered as a comparative advantage, because it will make country to produce goods that has lower opportunity cost (than the other country), specialize on it and then do the trade to buy other goods at a lower cost. It increases the overall consumption bundle for the country. In the above example, country A will only produce cars by putting all resources, build specialization and then trade with country B to get bikes at a cost that is lower than the cost they could incur if they produce themselves. So, it becomes a source of comparative advantage.

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2.

It is the approach where different stages of producing a product, takes place at different locations or different countries. It makes splitting of the value chain. For example, a smart phone is being finally assembled in the any country of Asia, but design and development has been done in the USA, processors and motherboards are produced in Germany, and battery and other parts are developed in China. Once produced, the smart phone is being marketed in countries in Africa. So, there are different stages of development, production and marketing of the phone, but these stages are performed in different countries. It is the example of splitting up of the value chain.