What determines comparative advantage?
Comparative advantage is a dynamic concept. It can and does change over time. Some businesses find they have enjoyed a comparative advantage in one product for several years only to face increasing competition as rival producers from other countries enter their markets. For a country, the following factors are important in determining the relative costs of production: • The quantity and quality of factors of production available (e.g. the size and efficiency of the available labour force and the productivity of the existing stock of capital inputs). If an economy can improve the quality of its labour force and increase the stock of capital available it can expand the productive potential in industries in which it has an advantage. • Investment in research & development (important in industries where patents give some firms significant market advantage) – for more information on this have a look at this page • Movements in the exchange rate. An appreciation of the exchange rate can caus
