Question

In: Economics

Assume that the US has a comparative advantage in producing good x, which it exports and...

Assume that the US has a comparative advantage in producing good x, which it exports and has exported for many years. Does that mean it will continue to have a comparative advantage in x? Why (not)? If not, why might it change?

Solutions

Expert Solution

No, it will not have a comparative advantage in X forever and it might change. The comparative advantage means the US is efficient in the production of that particular good and not the others, let's call the other good Y. So, they have to give up less amount of Y to produce good X. Giving them a comparative advantage.

Till now the US might be trading with countries who are good at production of Y and they have to give up less amount of X to produce Y. This makes them perfect trading partners.

Now, If the other nation develops a technology that enables them to produce X at a cost even cheaper than the US remember this cost in term of good Y. Then, in that case, the other nation will start producing good X and export it too. The US will become an importer of that good and will not export it anymore.

Second such situation arises when the factor intensity change. Suppose Good X was a labor-intensive good. With changing time and population the US is now a labor scarce country this will make them net importer of Labor intensive good and they will not be able to export those goods. Example Textile, steel etc. Now US import these good before we were exporting.  

Conclusion: A change in the resource like technology, amount of capital and labor can change what the nation exports and what they are importing. And these don't remain the same all the time but keep evolving with the economic condition of the nation.  


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