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Sources of Comparative Advantage

Q: The effect of resource endowments on comparative advantage can be summarized as followed:

Differences in relative resource endowments Differences in relatieve resource prices Differences in relative product prices Pattern of comparative advantage

Q: Wage inequality can be affected by the following factors:

· International trade, offshoring and technological change: Trade liberalization and falling transportation and communication costst result in an increase in the demand curve of skilled workers relative to unskilled workers. · Immigration: Immigration of unskilled workers results in a decrease in the supply of skilled workers relative to unskilled workers, thus promoting higher degrees of wage inequality. · Education and training: As the availability of education and training increases, so does the ratio of skilled workers to unskilled workers. Additional opportunities for education and training thus serve to reduce the wage inequaltiy between skilled and unskilled workers.

6 important questions on Sources of Comparative Advantage

Factor endowments as a source of comparative advantage:

· Relative labor productivity
· Labor costs
· Product prices.

The factor – endowment theory, Heckscher – Ohlin theory:

A theory by by Swedisch economists Eli Heckscher and Bertil Ohlin which focusses on the following questions:
· What determines comparative advantage?
· What effect does international trade have on the earnings of various factors of production in trading nations?

According to the Heckscher – Ohlin theory factor (resource) endowments determine a nation’s comparative advantage and asserts that the immediate basis fort rade is the difference between pre-trade relative product prices of trading nations. These prices depend on the production possibilities frontiers and tastes, and preferences (demand conditions in the trading countries.

How does the relative abundance of a resourde determine comparative advantage according to the factore – endowment theory?

When a resource is relatively abundant, its relative cost is less than in countries where it is relatively scarce. If resource is abundant in a country, it is mostly likely that it will be exported. If a resource is scarce in a country, it will be imported to a country.

The effect of resource endowments on comparative advantage can be summarized as followed:

Differences in relative resource endowments
Differences in relatieve resource prices
Differences in relative product prices
Pattern of comparative advantage

Is international trade a substitute for migration?

According to the factor – endowment theory of Hesckscher and Ohlin international trade can provide a substitute for the movement of resources from one country to another in its effects on resource prices. The endowments of reserouces among the countries of the world are not equal. For example, when Polish workers migrate to France, Wage rates tend to increase in Poland because labor becomes somewhat more scarces there. As a result, the domestic Polish workers can demand a higher salary. Simulataneously, the wage rate in France can decrease or increase slower as labor become abundant.

Wage inequality can be affected by the following factors:

· International trade, offshoring and technological change: Trade liberalization and falling transportation and communication costst result in an increase in the demand curve of skilled workers relative to unskilled workers.

· Immigration: Immigration of unskilled workers results in a decrease in the supply of skilled workers relative to unskilled workers, thus promoting higher degrees of wage inequality.

· Education and training: As the availability of education and training increases, so does the ratio of skilled workers to unskilled workers. Additional opportunities for education and training thus serve to reduce the wage inequaltiy between skilled and unskilled workers.

The question on the page originate from the summary of the following study material:

International Economics and Businesses.

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