The concept of comparative advantage

Comparative advantage is an essential idea in determining who trades with whom. David Ricardo invented it in order to explain international trade. In the preceding scenario of the United States vs Mexico in the production of construction equipment, the United States has a comparative advantage since their opportunity costs are lower. Following the implementation of the North American Free Trade Agreement (NAFTA), Hoover Corporation determined that it would be more cost effective to relocate production to Mexico. This is due to Mexico's comparative advantage in the manufacture of vacuum cleaners in comparison to the United States. The ability of a country's industry to innovate and upgrade determines its competitiveness. Because of her advanced technology, US is able to economically make high-tech construction equipment and export the same to Mexico hence competitive advantage. Yes such examples are consistent with the Heckscher-Ohlin Model which explains that nations export goods / services that can be produced efficiently and plentifully. This is where such countries have comparative advantage.

NAFTA has potential benefits to US and Mexican workers by creating for them additional opportunities in terms of free market for their industrial products. Consumers in both countries have increased access to new markets. They have been able to enjoy more goods varieties at cheaper prices. However NAFTA could kill local small industries as they have limited potential. The owners of production are able to access larger market hence increasing their revenues (Frederking, 2010).

Problem 2

A change in costs and comparative advantage

What will happen to trade between Norway and Spain? If the number of labor hours needed to grow ton of grain in Norway falls all the way to 2.0 hours, what will happen to the pattern trade.

Grain Labor hours

Spain 2 2.5

Norway 1 5

From above, it can be noted that Spain has absolute advantage in the production of grain while Norway has absolute advantage in the production of fish.

Trade makes country better off. Comparative advantage is when individual firm or a country has an ability to produce a good or service at a lower cost than others. For the case of Spain and Norway, we need to get the country with comparative advantage and which one should import from the other.

Problem 3


The concept of Comparative advantage is used to imply the capability of an individual and or a group in carrying out a particular economic activity, for instance, in making a particular product more efficiently as compared to another activity. It is also widely used to refer to the manner in which a country can specialize in generating and exporting goods and services that it can only produce more efficiently and economically i.e. at lower opportunity cost as compared to other goods and services which it can only import.

An increase in the factors of production will raise the production of goods that utilizes factor intensively and decreases the production of other goods.

This is because production is expected to increase up to a certain level and then reduces at it respond to the market availability of factors of production.

Problem 4

Trade Bargaining

As countries enter into international trade, they feel impacts associated with various factors. For instance, if knowledge and techniques of production are consistently spread across the globe, the point of production will rely on disparities in taxes, size of markets, factor costs, transportation costs, and tariffs. According to the theory of comparative advantage, differences between nations in comparative costs trigger international specialization in production. The degree of specialization is heightened by economies of scale, and this may allow a certain country to emerge as the only supplier of a given commodity or product.

Problem 5

The globalization debate

Generally, the aspect of globalization can be used to refer to a form of international integration which is basically as a result of interchange of products, ideas, world views and mostly importantly the aspects of culture. Culture, based on the ethnographical understanding can either be inherited or learned. Basically, in terms of inheritance, this implies that a definite ethnic group acquired their characteristics formally from their ancestors but in the case of learned acquisition, the characteristics were mostly as a result of influence from other cultures. In general terms, the process of learning can said to be as a result of the aspect of globalization whereby a given group was largely influenced by the other. This likewise, to some extent, had some impact to the group which originally inherited their cultures passed from their forefathers.


Anderson, J. E. & Wincoop, E. (2004). Trade Costs. Journal of Economic Literature. Vol. 42, pp. 691-751.

Frederking, J. (2010). Comparative Cost Advantage and Factor Endowment. München: GRIN Verlag.

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