Sources of Comparative Advantage
This chapter discusses the factor proportions explanation of comparative advantage. It explores the basic theory that economists use to explain the source of a nation's comparative advantage. Moving imported items or goods intended for export by truck across the 1,300 miles between the Indian port city of Chennai and Delhi in the nation's interior typically requires at least a full week at an average speed of less than 10 miles per hour. Both countries employ the same production technology. Hence, the relative factor endowments of the two nations and the relative factor requirements of the two goods determine where comparative advantages lie. According to the factor proportions approach, relative factor endowments of two nations and the relative factor requirements of two goods their residents trade determine where comparative advantage lies. Traditionally, countries with enough rich soil spread over large areas and sufficient sun and rain have tended to specialize in production of and export of agricultural products.