Factors determining Comparative Advantage for a country

A country can attain comparative advantage in producing goods and services that enables them to export that commodity to other countries. Litertaure on international trade and policy frameworks many reasons that allow countries to trade and export goods. Most of them can be classified into (1) Technological superiority, (2) Resource endowments, (3) Demand patterns, and (4) Commercial policies by Sanides (2009).

1. Technological Superiority

Technological superiority has formed the bases to economics two prime theories. First is that of Adam Smith’s theory of absolute advantage and other that of comparative advantage by David’s Ricardo (1817). These both theories formulate their grounds on the concept of country having technological superiority over other while producing a certain commodity. The concept of absolute advantage refers to the country’s ability to produce a commodity either with a higher productivity or at a lower cost per unit production than other country by Economist (2009). But country’s absolute advantage in producing a commodity does not necessarily means to bring mutual benefit to trade. For example: a country can have absolute disadvantage in all goods and services it produces compared to another country yet it can draw advantage by means of international trade. This tends to happen because of comparative advantage in producing a certain good comparing to other countries.

2. Resource Endowments

According to Seyoum (2007) countries who don’t pose technological superiority might experience abundance availability of resources than other countries giving them comparative advantage. This happens as resource availability allows them produce commodities in bulk and lower per unit cost than competing countries. Differences in relative factor endowments also lead to a country comparative advantage illustrates Rieti (2012). As promulgated by Heckscher and Ohlin country should specialize to produce commodity for which the resources are abundantly available in the country this will lead to comparative advantage by Subasat & Turan (2003).

3. Human skills:

Among various factors of production human skills (mental and physical) both act as an important resource for a country. Chor (2010) describes countries that have relative abundant human skills tend to have comparative advantage in producing commodities that extensively requires human skills. For example: Products that may require special skills in terms of engineering, programmers, web designer and many other highly skilled labor jobs would require certain skill set of employees. Since country with abundance of these type of skilled labor would reap comparative advantage than ones who does not.

4. Economies of Scale:

The term economies of scale refer to a company or country producing certain commodity in bulk quantities that allows them to reduce per unit cost of that product described by Palley (2008). Whereas government can also intervene to help lower the production cost by means of external economies by introducing certain industry policies that provides good infrastructure and well trained employees to the sector. This may boost or create a comparative advantage for the industry experiencing such economies of scale by Sanides (2010).

5. Technological Gap (Benefits of an Early Start) and Product Cycle:

Developed economies benefit from their developed industrial infrastructure as they tend to gain early start up advantage in producing most of products that brings them comparative advantage by International trade centre (2011). This gives them chance to cater to large local and international markets and milk the high margins at start until times with low factor cost countries enter the market domain for those products as explained by Vernon’s (1966).

6. Demand Patterns: Demand Considerations

Size of the domestic market and demand patterns have clear implications on developing equilibrium terms of trade and gains from it. Moreover, it also helps bring economies of scale and product cycle hypothesis.  According to Costinot (2009) relates that demand in local market steps as a milestone leading its success in international markets. As per Alessandrini et al (2007) concept producers develop new products to satisfy the home market needs initially. This gives them valuable experience and ensures to improve on their processes making product much efficiently and effectively bringing the cost effectiveness and comparative advantage respectively. Chang (2009) postulates exporting the product to countries with similar tastes/demand patterns. The theory, coupled with market imperfections and product differentiation can explain a large portion of intra-industry trade among the industrialized nations.

Keywords: Comparative Advantage, Framework for Comparative Advantage,