Question

6. Explain the comparative advantage of Vietnam in the recent context.

- What are the goods that Vietnam has comparative advantages?

- How to make best use of Vietnam’s comparative advantage?

Answer 1

Comparative advantage refers to an economy's capacity to produce certain goods at a lower cost than others. Since resources are limited and demand is unlimited, it's more economical to concentrate resources on the production of only a few goods in which an economy enjoys a comparative advantage. Comparative advantage often arises out of factor differentials. If a factor is abundant in an economy, its price will be cheaper relative to other factors that are scarce. For instance, Germany may be more efficient in producing both chemicals and textiles than Vietnam. But Vietnam may be able to produce textiles more cost-effectively as textiles require more labor and Vietnam is labor-intensive; the price of labor is cheaper than other factors in Vietnam. Hence, both countries will be able to use resources (capital, labor, land) more efficiently if they choose to specialise in goods that are more cost-effective for them.

Vietnam's Comparative Advantage:

Vietnam has abundant natural resources and abundant labor. As a result, Vietnam enjoys a comparative advantage in many agricultural products including rice, coffee, pepper, seafood as well as labor-intensive goods like footwear and textiles.

Best Use of Vietnam's Comparative Advantage :

As Vietnam has a highly skilled labor force, it should look to concentrate its resources on the production of goods that demand more labor. This will allow Vietnam to earn more returns as the cost of producing labor-intensive goods will be much lower as labor is relatively cheaper in Vietnam.

Vietnam has emerged as a hub for electronics, particularly for assembly and component production. Major electronics firms like Samsung have successfully established a base in Vietnam for taking advantage of lower cost of producing electronics in Vietnam. Today, electronics is one of the largest export sectors for Vietnam.