Comparative Advantage and Comparative Disadvantage Mean Opportunity
Comparative advantage is simply the country’s, firm’s, or individual’s ability to produce something at a lower opportunity cost (less resources) than others. Understanding the concept of comparative advantage in the global economy helps us understand why some countries specialize in the production and trade of certain commodities. It also helps us understand the factors that make one country better at producing X commodity than its neighboring countries (or any other country around the world).
Comparative disadvantage is the opposite of comparative advantage, which is a situation where a country, firm, or individual produces a good or a service at a higher opportunity cost (using more resources) than others.
In general, countries have comparative advantage in producing commodities that use their abundant resources. Resources such as climate, land, natural resources (minerals, oil, fertile soil), quantity and quality of its labor, capital, education, expertise, and geographical location can give a country comparative advantage. Countries will have comparative disadvantage if they produce commodities that use their scarce resources or resources they don’t have a lot of.
Example: China has cheaper price for its labor (not cheap labor) compared to the price of labor in the United States because there are many workers in China (higher supply) than in the United States. Saudi Arabia has an abundance of oil, and oil extracting is cheaper than it is in Kyrgyzstan for example. So, it makes economic sense for Saudi Arabia to specialize in the production of oil.
The structure and diversity of countries’ comparative advantage provide opportunities for international business. Each country has something unique that can make it either a good choice for production (using their abundant resources) or a good source for exporting (selling them what they cannot produce themselves).
Pick a country and evaluate its comparative advantage and comparative disadvantage. Then based on your findings, determine which of the following is a better business opportunity for a multinational corporation (choose only one).
- To manufacture in that country: State what commodity is best produced there.
- To import finished commodities from that country: State what type of commodities.
- To export commodities to that country: State what could be sold there.
Narration: You are highly encouraged to narrate your PowerPoint slides and add your voice and energy to your presentation.
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