Question

How does the concept of specialization determined by comparative advantage based on constant or increasing opportunity costs compare to the concept of specialization with increasing returns to scale? What do these differences imply about the types of products that are be traded and the types of countries that participate in trade?

Answer 1

Comparative advantage is a fact that represents a country is being capable to produce goods by using fewer resources, at a lower opportunity cost. The locus of a PPF shows the opportunity cost of production. when there is a focus on comparative advantaged good automatically the production of other goods will be less. Now linking this comparative advantage with a specialization is partially true for the production process. as the process is labor oriented or capital oriented it primarily depends on the quantity of that particular resource that must be high in quantity. of course, the specialization will add more productivity to the given resources.

Now if the comparative advantage is on the basis of constant opportunity cost, then the resources are equally suited for the production of two verities of goods. But an increasing opportunity cost creates a distinction between the resource allocation to two different products.

So if we will compare the increasing opportunity cost with increasing economies of scale for specialization, the economies of scale with specialization will produce more compare to the increasing opportunity cost.

In case of specialized products, they are more in quantity and the cost of production is less. so the country will be in a better off condition if there is a comparative advantage with specialization (mostly in terms of labor). this is happening due to the comparative advantage of the resource for that country along with the specialization which is mostly associated with labor-intensive countries.

Now if we will discuss the type of countries, who participate in trade are those who feel that trade will make them better off. Now sometimes some of the developed countries are also part of the trade along with an advantage in both the goods. In that case, the comparative advantage aspect of specialization makes labor-oriented products more efficient in the market.