Sources of Comparative Advantage - Online Tutor, Practice Problems & Exam Prep

Comparative advantage arises from factors like climate, domestic production inputs, labor specialization, technology, and geographical location. For instance, Costa Rica excels in banana production due to its tropical climate, while Canada benefits from abundant forests for lumber. The U.S. leverages specialized labor, whereas China capitalizes on its large workforce for mass production. Technological differences also play a role, as seen in Japan's optimization of existing products. Additionally, industries cluster in specific regions, creating external economies that enhance local comparative advantages, such as Hollywood for movies and London for finance.

Sources of Comparative Advantage

Alright, so now let's consider where comparative advantages come from, like why is one country better at producing something than another country might be. Let's see what those are now. So the sources of comparative advantage. Remember, this comparative advantage is being able to produce something at a lower opportunity cost, right, lower opportunity cost. So let's see what can influence these comparative advantages.

First one here is climate. So you can imagine that a country like Costa Rica with its tropical climate would be really good at producing bananas, right? Bananas. And you would imagine that a country like the UK, right, it's pretty cold there. They're not as good at producing bananas, but what they are really good at, and I'll tell you firsthand, is making strawberries. I have had some life-changing strawberries in the UK, and I suggest just going there just to get some strawberries and come home, but yeah. You can see here that these different countries are going to have a comparative advantage in these products just based on the climate, right? The strawberries, for whatever magical reason, are delicious in the UK, and the bananas grow very easily in Costa Rica. So you can see that the climate can have an effect on our comparative advantage.

How about this next one? Differences in domestic factors of production. Domestic factors of production. What does that mean? It means the factors of production, right, the inputs that we put into our products, what do we have domestically compared to the other country? So a good example here is Canada has a lot of forests, right? So in Canada, they'll be able to produce lumber products very easily, right? They have a lot of forests, they have a lot of available inputs into making lumber. Whereas in Iraq, I mean, I guess I'm not a geographical expert, but I'm going to guess that Iraq has no forests or at least very few forests compared to Canada, right? So you can see that Canada is going to have a comparative advantage just because they have a lot of forests available that Iraq doesn't have. Cool?

Alright, just the factors of production, just what is available in the country. So another factor of production is our labor and our capital, right, and we're going to see that the amounts of labor can have an effect on comparative advantage. So in the USA, we have a lot of specialized labor and we have, compared to China, we have a relatively small population compared to China. Right? But when we think about China, there they have a big population. Right? A really large population of unskilled workers. Right? There's a lot of people there, and there's a lot of unskilled work, but they have a really large population, so you can imagine the types of products that we would produce would be different. You can imagine in China, like we see, they produce a lot of household items and toys and things like that that all they have to do is put them together, they just need a lot of man hours and labor to get it done. Whereas in the US, right, we're all more specialized, we produce different things here. We might be more creative, we have more ideas in making the products, right? But in China, that's where they really produce them because they have a lot of labor and that's where their comparative advantage would come from, right?

So let's go on to this next one, differences in technology, and you'll see that the way we use technology is going to be a little different in every country too. So like we were saying, in the US, we're pretty specialized, we like creating stuff, right? So we use our technology to help us create stuff. Whereas in Japan, it's been known that what they like to do or what they're good at is what they take products that exist and they optimize their production, right? So they're really good at optimization. They take a product that's being produced already like when there were cars being produced in the US, Japan went and optimized the production process and made cars even cheaper and better, just based on how they use technology, right? So the way we use technology can also lead to comparative advantages.

And the last one here is actually a pretty cool, pretty interesting topic, this idea of external economies. So this is going to be a geographical advantage just based on where the industry is located, right? So if you think about Southern California, they make tons of movies there right? We've got Hollywood in California and you might think why are the movies made there, right? What causes Southern California to be this movie mecca? Well, it's kind of like that it just got lucky, right? The industry grew, the movie industry grew in Southern California, so people who wanted to be involved in the industry would go there, so what ended up happening is like if you wanted to be an actor, right, you'd probably go to California to try and find a job in a movie. You wouldn't go to like Kentucky or somewhere random because that's not where the industry is located, right? You want to be where the action is if you want to of inputs into the movie-making process, right? The good talent is going to go there, directors are already there, there are sets designed there, right, the city is already made for making movies. Just like in London, if you wanted to be some sort of financial expert, finances right, if you want to be a financial expert, London would be a great city to work in, right? They have a huge commercial district there, or something like New York, right? These cities have grown to be financial hubs and they attract talent who wants to be good in this field, they're going to go to these cities, right? You're going to go where the action is if you want to succeed. So that's what ends up happening is these places get a comparative advantage just because the industry is located there. Cool? Alright, so that's kind of where these comparative advantages can come from. Let's go ahead and move on to the next video.

Here’s what students ask on this topic:

What are the main sources of comparative advantage?

The main sources of comparative advantage include climate, domestic factors of production, labor specialization, technology, and geographical location. Climate affects agricultural outputs, such as Costa Rica's advantage in banana production. Domestic factors of production refer to the availability of resources like Canada's forests for lumber. Labor specialization varies by country, with the U.S. having specialized labor and China having a large unskilled workforce. Technological differences also play a role, as seen in Japan's optimization of existing products. Lastly, geographical location can create external economies, such as Hollywood's dominance in the movie industry and London's role in finance.

How does climate influence comparative advantage?

Climate significantly influences comparative advantage by determining the types of crops and products that can be efficiently produced in a region. For example, Costa Rica's tropical climate makes it ideal for banana production, while the UK's cooler climate is better suited for growing strawberries. These climatic conditions lower the opportunity cost of producing these goods in their respective countries, giving them a comparative advantage in these products.

What role do domestic factors of production play in comparative advantage?

Domestic factors of production, such as natural resources, labor, and capital, play a crucial role in determining a country's comparative advantage. For instance, Canada has abundant forests, making it efficient in producing lumber. In contrast, Iraq, with fewer forests, lacks this advantage. Similarly, the U.S. benefits from specialized labor, while China leverages its large unskilled workforce for mass production. These differences in domestic factors influence the types of goods and services a country can produce at a lower opportunity cost.

How do differences in technology contribute to comparative advantage?

Differences in technology contribute to comparative advantage by affecting how efficiently countries can produce goods and services. For example, the U.S. uses advanced technology to create innovative products, while Japan excels in optimizing existing production processes, such as making cars cheaper and better. These technological capabilities allow countries to produce certain goods more efficiently, thereby lowering their opportunity costs and giving them a comparative advantage in those products.

What are external economies and how do they affect comparative advantage?

External economies refer to the benefits that firms gain from being located near each other in a specific region. These benefits include access to specialized labor, suppliers, and infrastructure. For example, Hollywood in Southern California has a comparative advantage in movie production due to its concentration of talent, studios, and related services. Similarly, financial hubs like London and New York attract financial experts and firms, enhancing their comparative advantage in the finance industry. These geographical clusters create an environment that supports and enhances the efficiency of the industry, leading to a comparative advantage.