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, contrasting with China's large, unskilled workforce. 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 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 one country is 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. The 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. And 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, right? So you can see that climate can have an effect on our comparative advantage.

The next one is differences in 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 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, so just the factors of production, just what is available in the country. 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, a relatively small population. 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 manhours 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?

Let's go on to the 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 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, 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 want 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, 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, 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 is ideal for banana cultivation, giving it a comparative advantage in banana production. Conversely, the UK's cooler climate is more suitable for growing strawberries. These climatic conditions lower the opportunity cost of producing these goods in their respective countries, making them more competitive in these specific markets.

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. The availability of skilled or unskilled labor also affects production capabilities. The U.S. benefits from specialized labor, while China leverages its large population of unskilled workers for labor-intensive manufacturing. These factors lower the opportunity cost of producing certain goods, giving countries a comparative advantage in those areas.

How do differences in technology contribute to comparative advantage?

Differences in technology contribute to comparative advantage by enhancing production efficiency and innovation. For example, the U.S. uses advanced technology to create new products, while Japan excels in optimizing existing production processes. This technological edge allows countries to produce goods at a lower opportunity cost, making them more competitive in the global market. Technological advancements can lead to better quality products, reduced production costs, and increased productivity, all of which contribute to a country's comparative advantage.

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

External economies refer to the benefits that firms receive from being located near each other in a specific region. These benefits include access to a skilled labor pool, specialized suppliers, and shared infrastructure. For example, Hollywood's concentration of movie studios, talent, and resources creates a comparative advantage in film production. Similarly, financial hubs like London and New York attract financial experts and institutions, enhancing their comparative advantage in finance. These clusters reduce production costs and increase efficiency, making industries in these regions more competitive.