Question

Once upon a time, the USA had a large manufacturing sector and the USA used to produce many goods and export some of those goods to other countries. However, the manufacturing industry has been shrinking in the USA as the graph below shows. In such, the USA lost some of its "comparative advantage" in the manufacturing industry!

Any idea what gives a particular country a comparative advantage in producing certain commodities?

Answer 1

When a country produces a good or service for a lower cost of production than other countries, the comparative advantage is. A trade-off is a calculation of opportunity cost. A country with a comparative advantage is worth the trade-off. The drawbacks outweigh the benefits of buying their goods or services. When manufacturing it, the nation may not be the best. But for other countries, the product or service has a low cost of opportunity to manufacture.

For example, in chemicals, oil-producing nations have a comparative advantage. Their local gas, as opposed to countries without it, provides a cheap source of material for the chemicals. Many of the raw ingredients are produced during the cycle of oil distillery. As a result, U.S. chemical production companies compete with Saudi Arabia, Kuwait, and Mexico. Their chemicals are inexpensive, making the cost of their opportunity low.

In the past, there have been more comparative advantages in goods and rarely in services. That's because selling goods is simpler. However, telecommunications technology such as the Internet makes it easier to export services. These services include call, banking, and entertainment centers.

Absolute benefit is that a nation does something more effectively than other countries. In food, gasoline, and petrochemicals, nations blessed with an abundance of soil, fresh water, and oil reserves have an absolute advantage. Just because a country in a field has an absolute advantage doesn't mean it's going to be its comparative advantage. This depends on the cost of trading opportunity. Say his neighbor has no oil but a lot of fresh water and farmland. In return for gas, the neighbor is willing to trade a lot of food. Now there is a comparative advantage in oil in the first nation. It can get more food from its neighbor by trading it for oil than it could produce on its own.