Free Trade and Protection
Sources of Comparative Advantage
What is Comparative Advantage?
Comparative advantage is where a country can produce a good or service with the lowest opportunity cost. Countries that specialise and produce goods and services that they have a comparative advantage in can experience a mutual gain in trade.
What are the Sources of Comparative Advantage?
Comparative advantage is determined by a country's resources, that is the land, labour, capital and enterprise.
Endowment of natural resources
Quality of labour force - skilled and qualified workforce to ensure labour productivity
Quantity of labour - size of the labour force
Wage costs of labour
The quality of capital - is the production of goods and services using the latest technology?
Quantity of capital - capital to labour ratio
Managerial processes to ensure the efficiency of labour and capital
Utilising technological change
Leading research and development
Level of protectionism
Case Study: Australia's Comparative Advantage in Iron Ore
The Australian economy is one of the most competitive in the production of iron ore, which is mainly driven by the country's naturally rich resource deposits of high-quality iron ore. In addition, the structure of the labour force is ideal for the production of iron ore. Iron ore is highly capital intensive, which is advantageous on Australia's small but highly skilled labour force. While Australia's mining wages are very high, they are compensated by high levels of capital deepening, increasing labour productivity and driving down unit costs of production.
Australia's low level of protection and formation of trading partners such as those with China, Japan and Korea, make accessing iron ore export markets easier.