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International Trade

Sources of Comparative Advantage


Sources of Comparative Advantage

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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, 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 first hand is making strawberries, I have had some life changing strawberries in the U. K. And I suggest just going there just to get some strawberries and come home. But yeah, you can see here that these these different countries are gonna 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 the climate can have 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 in Canada they'll be able to produce lumber products very easily. Right? They have a lot of forest they have a lot of available inputs into making lumber. Where in Iraq I mean I guess I'm not a geographical expert but I'm gonna 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. All right so 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 gonna see that um the amounts of labor can have an effect on comparative advantage. So in the U. S. A. 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 uh there they have a big population, right? A really large population of unskilled workers right? There's a lot of people there um 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 you know 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 where in the US, right? We're all more specialized, we produce different things here. We might be more creative. We have more ideas and 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 gonna be a little different in every country too. So like we were saying in the U. S. Were pretty specialized. We like creating stuff. Right? So we use our technology to help us create stuff where in Japan it's been known that what they like to do or what they're good at is what they, 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 optimize the production process and made cars even cheaper and better. Uh 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 pretty cool, Pretty interesting topic. This idea of external economies. So this is gonna be a graphical 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, why are the movies made? They're right. What, 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 succeed in that business. So southern California, just by being the location of where movies are made, it ends up attracting all sorts of um of inputs into the movie making process, right? The good talent is going to go there. Directors already there, there sets design there, right? The 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 um or something like new york, right? These cities have grown to be financial hubs and they attract talent who want to be good, you know, in this field, they're gonna go to these cities, right? You're gonna go where the action is if you want to succeed. So that's what ends up happening. Is these 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.