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International Trade, Comparative...
The Sources of Comparative Advantage

Individuals may have comparative advantages in different activities because of differences in skills, training, physical characteristics, and other factors. For example, if you are quick, agile, and seven feet tall, you are likely to have a comparative advantage in playing basketball. While we can easily understand how comparative advantages may arise in people, what about places? What gives rise to differences in comparative advantage across regions or nations?

The Heckscher-Ohlin Theorem

Just as individuals have different endowments of attributes, including such things as skill, intelligence, and physical characteristics, regions have different factor endowments. These include such things as the amount and quality of land, number of people, amount of human and physical capital, endowment of natural resources, and more. The idea that an economy’s comparative advantage stems from its factor endowments is known as the Heckscher-Ohlin theorem, named after the two economists who first proposed it. Thus, India has a comparative advantage in producing textiles, a labor-intensive process, because it is well endowed with unskilled labor, while Japan has a comparative advantage in producing electronic equipment because it is richly endowed with capital and skilled labor.



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