A:

Globalization has made the concept of comparative advantage more relevant than ever. Comparative advantage is defined as one country's ability to produce a good or service more efficiently and inexpensively than another. Economist David Ricardo defined the theory of comparative advantage in the early 1800s. Some of the factors that influence comparative advantage include the cost of labor, cost of capital, natural resources, geographic location and workforce productivity.

Comparative advantage has influenced the way economies work from the time that countries first started trading with each other many centuries ago. Globalization has brought the world together by encouraging more trade among nations, more open financial institutions and a greater flow of investment capital across international borders. In a globalized economy, countries and businesses are connected in more ways than ever before. Rapid and efficient transportation networks have enabled the cost-effective shipment of goods across the world. The global integration of financial markets has dramatically lowered barriers to international investment. The near-instantaneous flow of information over the Internet enables companies and businesspeople to share knowledge about products, production processes and pricing in real time. Together, these developments improve economic output and opportunities for both developed and developing nations. These factors also cause greater specialization based on comparative advantage.

Less-developed countries have benefited from globalization by leveraging their comparative advantage in labor costs. Corporations have shifted manufacturing and other labor-intensive operations to these countries to take advantage of lower labor costs. For this reason, countries such as China have seen exponential growth in their manufacturing sectors in recent decades. Countries with the lowest labor costs have a comparative advantage in basic manufacturing. Globalization has benefited developing countries by providing jobs and capital investments that would not have otherwise been available. As a result, some developing countries have been able to progress more quickly in terms of job growth, educational attainment and infrastructure improvements.

Advanced economies, such as the United States, Canada, Japan and much of Europe, have benefited from globalization in numerous ways. The concept of comparative advantage has provided the intellectual basis for most trade policy changes in developed nations over the past half-century. These nations have a comparative advantage in capital- and knowledge-intensive industries, such as the professional services sector and advanced manufacturing. They have also benefited from low-cost manufactured components that can be used as inputs into more advanced devices. Additionally, shoppers in advanced economies save money when they are able to buy consumer goods that cost less to produce.

Opponents of globalization argue that middle-class workers cannot compete with low-cost labor in developing countries. Lower-skilled workers in advanced economies are at a disadvantage because the comparative advantage in these countries has shifted. These nations now have a comparative advantage only in industries that require workers to have more education and to be flexible and adaptable to changes in the global marketplace.

RELATED FAQS
  1. How do "factor endowments" impact a country's comparative advantage?

    Find out how factor endowments – namely labor, land and capital – affect a country's comparative advantage and how that advantage ... Read Answer >>
  2. What are some real life examples of absolute advantage?

    Learn about absolute advantage, comparative advantage and their impact on trade through a real-world example involving call ... Read Answer >>
  3. What is comparative advantage?

    Comparative advantage is an economic law that is foundation for free-trade arguments. Read Answer >>
  4. What is the difference between absolute and comparative advantage?

    Learn about the difference between absolute and comparative advantage and how these two key economic concepts help shape ... Read Answer >>
  5. How do I determine my company's competitive advantage?

    Find out how to determine if your company has a competitive advantage and, if so, learn how to figure out how to make it ... Read Answer >>
  6. What countries represent the largest portion of the global banking sector?

    Learn how four countries, China, the U.K., France and the U.S., exhibit the greatest influence over the global banking sector, ... Read Answer >>
Related Articles
  1. Investing

    How Globalization Affects Developed Countries

    The increase in communications technology has companies competing in a global market.
  2. Insights

    What Is International Trade?

    Everyone's talking about globalization, learn what is it and why some oppose it.
  3. Insights

    Basic Concept Of Absolute Advantage

    Absolute advantage is the ability of an individual, country or company to produce a good or service at a lower cost than any competitor. An entity with an absolute advantage requires fewer inputs ...
  4. Insights

    How Saving Too Much Can Sap Economic Growth

    Many emerging Asian economies have high savings and low consumption rates. We look at how this impacts their economic development.
  5. Insights

    5 Economic Effects Of Country Liberalization

    Liberalization of countries in emerging markets provides new opportunities for investors to increase their diversification and profit.
  6. Financial Advisor

    These Will Be the World's Top Economies in 2020

    Discover the current economic forces that are anticipated to significantly shift the landscape of the world's most powerful economies over the next decade.
  7. Insights

    Could Third World Debt Relief Pay Off?

    Debt is as much a political tool as an economic one. Discover if wholesale debt forgiveness is the answer for developing countries.
  8. Insights

    Top 25 Developed and Developing Countries

    The difference between developed and developing countries, along with a list of the status of 25 nations around the world.
RELATED TERMS
  1. Competitive Advantage

    Competitive advantage is a superiority that a firm has over its ...
  2. Advanced Economies

    Advanced economies, as described by the International Monetary ...
  3. Globalization

    Globalization is the extension and integration of cross-border ...
  4. Closed Economy

    A closed economy considers itself self-sufficient and has no ...
  5. Country Basket

    A country basket is a selection of countries that are grouped ...
  6. Country Fund

    A country fund is a mutual fund that invests in one country.
Hot Definitions
  1. Investment Advisor

    An investment advisor is any person or group that makes investment recommendations or conducts securities analysis in return ...
  2. Gross Margin

    A company's total sales revenue minus its cost of goods sold, divided by the total sales revenue, expressed as a percentage. ...
  3. Inflation

    Inflation is the rate at which prices for goods and services is rising and the worth of currency is dropping.
  4. Discount Rate

    Discount rate is the interest rate charged to commercial banks and other depository institutions for loans received from ...
  5. Economies of Scale

    Economies of scale refer to reduced costs per unit that arise from increased total output of a product. For example, a larger ...
  6. Quick Ratio

    The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
Trading Center