191
There are many reasons for a comparative advantage to exist, including:
1. Natural resources. Many places do not have sufficient natural resources to provide food, energy, and water for their populations. Within countries, cities and
large urban areas must bring FEW resources from their surrounding areas and
other areas inside and outside their home country to make sufficient FEW commodities available to their resident populations. Rural areas are often able to
produce more FEW resources than their people require. Chapter 18 explores
some of the complex FEW relationships of cities. Countries may have an
abundance of arable land or in one or more minerals, while other countries have
limitations on one or more such resources.
2. Product Preferences. Even when locations can produce their own FEW
resources, populations may have preferences different from those that they can
provide for themselves. For example, an area may produce more than enough
grains but demand more meat, while another location may produce wind power
but demand oil. A difference in preferences may be rooted in cultural differences
that shape dietary choices or in aspirations such as lower carbon emissions.
3. Capital goods. This term refers to the machinery, infrastructure, communications systems, and other physical assets of a location that facilitate its ability to
produce products. Farm equipment, power plants and electric grid infrastructure,
water treatment and waste management plants, and all physical systems that
enable them to operate are examples of capital goods that affect a location’s ability to produce food, energy, and water commodities. A location with limited
capital good is limited in its ability to utilize natural resources.
4. Human resources, such as the skills and abilities of a workforce, has traditionally been a major factor in their ability to produce diverse products. These are
often a reflection of investment in education, skill development, and dissemination of new ideas and skills. However, increasing education standards throughout
the world, combined with the mobility of many skilled workers, has reduced the
very major differences within countries and between countries that have existed
historically.
5. Technological capacity combines capital goods with natural and human into the
ability to produce specific outputs (goods and services) and is influenced by
additional factors such as economics and government policies.
6. Economies of Scale result in a lower unit price for a commodity. This can occur
in two quite different ways:
First, within a single process, the output of many goods can be achieved without requiring an equivalent increase in inputs, because of increasing the efficiency
of use of one or more input or by spreading fixed costs (e.g., the cost of a piece of
equipment) over a larger amount of production. For example, historically, larger
power plants have been able to produce electricity more efficiently than a smaller
power plant. As a result, one large power plant could generate electricity at a
lower cost than two smaller power plants of equivalent capacity.
The second way that economies of scale can occur is through the amalgamation of industries that are supportive of each other. For example, a petrochemical
7 Trade
There are many reasons for a comparative advantage to exist, including:
1. Natural resources. Many places do not have sufficient natural resources to provide food, energy, and water for their populations. Within countries, cities and
large urban areas must bring FEW resources from their surrounding areas and
other areas inside and outside their home country to make sufficient FEW commodities available to their resident populations. Rural areas are often able to
produce more FEW resources than their people require. Chapter 18 explores
some of the complex FEW relationships of cities. Countries may have an
abundance of arable land or in one or more minerals, while other countries have
limitations on one or more such resources.
2. Product Preferences. Even when locations can produce their own FEW
resources, populations may have preferences different from those that they can
provide for themselves. For example, an area may produce more than enough
grains but demand more meat, while another location may produce wind power
but demand oil. A difference in preferences may be rooted in cultural differences
that shape dietary choices or in aspirations such as lower carbon emissions.
3. Capital goods. This term refers to the machinery, infrastructure, communications systems, and other physical assets of a location that facilitate its ability to
produce products. Farm equipment, power plants and electric grid infrastructure,
water treatment and waste management plants, and all physical systems that
enable them to operate are examples of capital goods that affect a location’s ability to produce food, energy, and water commodities. A location with limited
capital good is limited in its ability to utilize natural resources.
4. Human resources, such as the skills and abilities of a workforce, has traditionally been a major factor in their ability to produce diverse products. These are
often a reflection of investment in education, skill development, and dissemination of new ideas and skills. However, increasing education standards throughout
the world, combined with the mobility of many skilled workers, has reduced the
very major differences within countries and between countries that have existed
historically.
5. Technological capacity combines capital goods with natural and human into the
ability to produce specific outputs (goods and services) and is influenced by
additional factors such as economics and government policies.
6. Economies of Scale result in a lower unit price for a commodity. This can occur
in two quite different ways:
First, within a single process, the output of many goods can be achieved without requiring an equivalent increase in inputs, because of increasing the efficiency
of use of one or more input or by spreading fixed costs (e.g., the cost of a piece of
equipment) over a larger amount of production. For example, historically, larger
power plants have been able to produce electricity more efficiently than a smaller
power plant. As a result, one large power plant could generate electricity at a
lower cost than two smaller power plants of equivalent capacity.
The second way that economies of scale can occur is through the amalgamation of industries that are supportive of each other. For example, a petrochemical
7 Trade