Question

Toyota and Mazda will build a new plant. Toyota will assemble carrolas and Mazda a crossover vehicle. How does this desicion relate to the concepts of specialization and comparative advantage?

Answer 1

The principle of Comparative Advantage states that a country will produce the goods which it can produce most efficiently. The country will have lower opportunity cost in the production of those goods. The country will export those goods which have a lower opportunity cost, i.e. in which it has comparative advantage) and import those goods which have a higher opportunity cost.

In this case, Toyota will have the necessary skills to produce Carolla and Mazda will have the skills to produce a crossover vehicle. Toyota has a comparative advantage in the production of Carolla and Mazda has a comparative advantage in the production of a crossover vehicle.