Chapter 8, Problem aWYWL

To determine

To write:

The meaning of comparative advantage and explain the reason why it leads to international trade.

Concept Introduction:

Comparative Advantage is the concept of analyzing, sourcing and implementing various factors or measures which will improve or enhance the productive efficiency or capacity of goods or services and lower the expenditure or loss, to help the business entities or the nation to make it one of the frontrunners in the aforesaid area or sector when compared to other business or nation.

Explanation of Solution

An example of comparative advantage: India’s comparative advantage over the United States is in the form of cheap labor. India’s expertise lies in providing quality IT services at cheaper costs when compared to the US. The US comparative advantage is in the specialized, capital intensive labor. Americans produce sophisticated goods or investments opportunities at lower opportunity costs.

This concept takes into consideration various factors like the geographical area, capital, labor, natural resources etc of a business or nation. This is compared it with other competing business or nation to ascertain if the goods or services produced are actually profitable or if the business or nation has to consider choosing a different product or service. It also embodies as to how the concept must be implemented to enhance the existing opportunities of the business or nation.

By following the above mentioned principles, a nation or a business can gain possible advantages internationally by increasing its strengths and thereby growing into a global powerhouse.