Question

Explain the implications of comparative advantage. Specifically, think about what contributes to comparative advantage and what are potential outcomes. Find a current event, something that has taken place in the last year, that shows an example of economic comparative advantage. Please post with 200+ word response.

Answer 1

The implication of comparative advantage is that a country produces goods and services at a low opportunity cost than other countries.So trade off between two countries is measured by the opportunity cost.It is possible that the country is not the best in producing the goods but since the opportunity cost is low ,import by other countries will increase.

The main factor that contribute to comparative advantage is the quantity and quality of the factors of production available in the country like mineral resources gold,iron , copper etc.The movement of exchange rate affects imports and exports .For eg if the currency of home country depreciates, exports will become cheap and increase.Again exports become expensive and imports become cheap , when there is increase in the rate of inflation in the country.Trade barriers also contribute to comparative advantage like subsidy increase export and tax lower imports.The benefit of comparative advantage is more for countries with low opportunity cost.In the case of comparative advantage,the opportunity cost ,that is the potential benefit which has been given up ,is lower for one country than the other country.The country with low opportunity cost, ie the one with small loss in potential benefit, has the advantage.

One recent example is the call centers in India. US based companies take the advantage of those call centers in India because they are cheap. It is expensive to set a call center in America.Since cheap service is available in India, the trade off brings benefit to America.