Question

Using the concept of oppoprtunity cost to determnne comparative advantage, explain what accounts for differences in opportunity costs?

Answer 1

Differences in opportunity cost determine the comparative advantages. Hence, different countries tend to specialize in different commodities. Following factors accounts for differences in opportunity costs:

• Availability of natural resources: Natural resources are not equally abundant in all countries. Hence, country tends to specialise in commodities whose raw materials are available in large quantity.
• Level of infrastructure also decides the specialisation of country.
• Level of innovation causes differences in comparative advantages.
• changes in exchange rate, also affects the import and exports and accordingly, country specialisation also undergoes changes.