Question

Please explain the reasons for some service exports of developing countries based on the theory of comparative advantage.

Answer 1

When it comes to international trade, a country must focus on producing goods and services that has the least opportunity costs compared to the any other nation the country is trading with.  

Say that in an international trade between two nations, A and B where country A and B produces computers and Gunpowder. The opportunity cost of producing both the commodities by the respective nation is as follows

	A' s Opportunity Cost	B's Opportunity Cost
Computers	1	3
Gunpowder	3	0.75

From the above combinations, we see that A has a comparative advantage to produce computers when compared to B producing computers as the opportunity cost for A to produce computers is lesser than that of B.

Similarly, B has a comparative advantage to produce Gunpowder when compared to A producing Gunpowder as the opportunity cost for B to produce Gunpowder is lesser than that of A. As a result, in the time of trade, A trades (Sells) computers to B and B trades (Sells) gunpowder to A.

Developing nations have surplus cheap labor when compared to developed nations. Take the example of India, where there are 6 million labor force added to the total labor force in the country. As a result, a service processing export such as ( BPOs :Business Processing Outsourcing ) are very popular in developing nations such as India. The nation, thus has a comparative advantage in service export than any other (developed) nation it trades with.

The nation is able to render the same service at very cheap costs, than any other developed nation, due to the fact that the opportunity cost of rendering services is very low as there is an abundance in labor. As a result, the developing nation like India has specialized in service sector and has become a service oriented economy as it provides outsourceable services to trading nations.