Why might exploiting a comparative advantage increase real incomes?
I just need two reasons
Exploiting a comparative advantage can increase real incomes for several reasons:
1. Specialization: When a country focuses on producing the goods and services it can produce most efficiently (according to its comparative advantage), it can specialize in those industries. This allows for increased productivity and efficiency in production. With specialization, a country can produce more output from the same amount of resources, leading to higher real incomes.
To determine a country's comparative advantage, you can follow these steps:
- Identify the goods or services that a country can produce at a relatively lower opportunity cost compared to other countries. The opportunity cost is the value of the alternative goods or services that could have been produced with the same resources.
- Compare the opportunity costs of two countries for each good or service. The country with the lowest opportunity cost has a comparative advantage in producing that particular good or service.
2. Trade: Exploiting a comparative advantage also encourages trade between countries. When countries specialize in producing goods or services in which they have a comparative advantage, they can trade these products with other countries for goods or services they cannot efficiently produce themselves. This trade allows countries to access a wider variety of goods and services at more competitive prices. By engaging in international trade, countries can enhance their overall economic growth, which can lead to higher real incomes.
To engage in trade based on comparative advantage, countries can follow these steps:
- Identify the goods or services in which each country has a comparative advantage.
- Determine the terms of trade, which is the rate at which one good or service is exchanged for another in trade.
- Engage in international trade by exporting the goods or services in which the country has a comparative advantage and importing others in exchange.
By leveraging their comparative advantages, countries can increase their productivity and efficiency, access a broader range of goods and services through trade, and ultimately raise their real incomes.