Question

How would you explain the idea of comparative advantage to those who does not study business?

Answer 1

Comparative advantage is nothing but a country doing something which they are good at. This can mean producing a good at a lower price and exporting it.

For example, US is a capital-rich country and Mexico is a labor abundant country. Now, because of the fact that the US is having a lot of capital the interest will be low here in the US. There are an excess supply and low demand. Similarly, the same thing will happen with the labor in Mexico.

When the US goes on using its capital and produces something it will be done at a lower cost, like making a high-class computer or an iPhone. And Mexico when goes to produce goods like clothes and other low-cost manufacturing it can achieve it a lower cost. That means the US has a comparative advantage in Capital intensive good and Mexico in Labor intensive good. Because Capital goods are cheaper in the US it can export it and earn revenue, they are good at it. And Mexico can do what they are good at doing export their cheaper products to the world and earn revenue from it.