1
$\begingroup$

Is comparative advantage determined by simple productivity? In other words, a production function that takes in... some kind of input, uses labor, and capital, and produces an output? In this case, is it the labor productivity, the capital productivity, or the cost of the input that determines the productivity and therefore the comparative advantage of the country? (We know that significant advances in technology can mean that a new production technique is acquired, whereby a different kind of input, which is net cheaper, is used to produce the same output.) (I guess it's also possible that the good could be more expensive, but is used to produce anyway because of something not captured in prices which is better for the country.)

Or, is it simply production possibilities? I have also seen comparative advantage examples where the amount a country can produce of a good if it mobilizes all its resources determines its comparative advantage. In that case, a country is incentivized to only invest in capital in one industry and ignore all others (assuming it is determined by the government, and not privately controlled and decided) in order to create a comparative advantage.

So productivity? (In what kind?) Or production possibilities?

$\endgroup$

2 Answers 2

1
$\begingroup$

Comparative advantage is based on opportunity cost (see Krugman et al International Economics Ch 3). However, opportunity cost depends on how productive economy is so you can in principle reformulate it in terms of productivity production possibilities.

For example, if with 1 unit of labor an economy can produce 10 oranges or 50 apples then opportunity cost of 1 orange is 5 apples and opportunity cost of 1 apple is 1/5 if an orange. If productivity of producing apples increases and a country can now produce 60 apples the opportunity cost of 1 orange increases to 6, meaning country now has higher comparative advantage in production of apples than before.

Also note comparative advantage is relative. A country cannot have comparative advantage in everything no matter how much it tries.

For example, suppose we have productive country that can produce with 1 unit of labor 10 oranges and 50 apples. Then suppose we have second country that with 1 unit of apples can produce 5 oranges and 10 apples. In country A opportunity cost of 1 orange is 5 apples, in country opportunity cost 1 orange is 2 apples, so despite country A being literally better at anything its comparatively (i.e. relatively) cheaper to produce apples in country B.

Regardless of productivity a country will have some comparative advantage except for one special case where the opportunity costs are equal in both countries e.g. country A being able to produce 10 oranges or 50 apples with 1L and country B 1 orange or 5 apples. But in that case neither country has comparative advantage.

Comparative advantage is always relative. Do not confuse it with absolute advantage which means country can produce more of something in absolute terms as opposed to relative terms.

$\endgroup$
0
$\begingroup$

The modern approach to comparative advantage is based on production possibilities. A country's production possibility frontier encloses all combinations of goods which it is capable of producing given all the inputs it has (eg labour, capital, natural resources). Starting from any point on the frontier, it is possible to increase production of one good only by reducing production of one or more other goods. In other words, extra production of one good has an opportunity cost in the form of reduced production of other goods. In a simple 2-country case with 2 goods A and B, a country has a comparative advantage in production of A if its opportunity cost in terms of B of producing an extra unit of A is less than that of the other country.

Historically, the idea of comparative advantage goes back at least to Ricardo who, however, presented it in terms of a labour theory of value. Confusingly, perhaps, explanations of comparative advantage still often focus on Ricardo's famous cloth-wine example in which the focus was on the labour inputs needed to produce one unit of each good in England and Portugal respectively (see for example Wikipedia's explanation).

The reformulation and improvement of the theory in terms of production possibilities and opportunity costs is due to Haberler as explained in this short paper by Bernhofen (2005).

$\endgroup$
2
  • $\begingroup$ So then couldn't a country just invest everything in one industry to make sure they have a global comparative advantage, and specialize in it? Then comparative advantage is easily changeable, right? $\endgroup$
    – john
    Feb 6, 2023 at 4:57
  • $\begingroup$ @john Please post new questions as new questions. When you do so, you might want to support your guesses with your thought process and/or sources. $\endgroup$
    – Giskard
    Feb 6, 2023 at 7:19

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service and acknowledge you have read our privacy policy.

Not the answer you're looking for? Browse other questions tagged or ask your own question.