Both the United States and Canada produce automobiles and their components; however, each particular model or component is produced in only one of the two countries. Which factor explains this pattern of production and trade?

Question

Ally Watson

Business

17 February, 05:08

Both the United States and Canada produce automobiles and their components; however, each particular model or component is produced in only one of the two countries. Which factor explains this pattern of production and trade?

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Answers (1)

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Douglas Spears · Answer 1

Answer: Comparative advantage.

Explanation:

The pattern of production and trade is largely based on the comparative advantage.

Comparative advantage: A country has a comparative advantage in producing a commodity if the opportunity cost of producing that commodity in terms of other commodity is lower than the other country.

A nation exports the commodity in which it has a comparative advantage and imports the commodity in which it has a comparative disadvantage.

Therefore, it is totally depend upon the opportunity cost of producing a commodity in terms of other commodity.