The correct answer is option (a) – comparative advantage is determined by supply conditions only when tastes are identical between countries. Let’s explore this concept in detail and then explain why the other options are not correct.
Comparative advantage is a fundamental concept in economics that explains why countries engage in international trade. It is based on the principle that, even when one country is less efficient at producing all goods compared to another country, both countries can benefit from trading those goods. In the context of identical tastes between countries, comparative advantage is determined solely by supply conditions.
Explanation of the Correct Answer (Option a):
Supply Conditions Only:
When tastes are identical between countries, it means that consumers in both countries have the same preferences and demand for goods.
In this scenario, the decision to engage in trade is driven by differences in the supply conditions, such as the cost and efficiency of production. Countries will specialize in producing goods in which they have a comparative advantage based on their production capabilities.
For example, let’s consider two countries, Country A and Country B. Both countries have the same tastes, meaning their consumers want the same goods.
However, the production conditions in these countries differ. Country A might have a more efficient and cost-effective way of producing cars, while Country B might excel in the production of electronics. In this case, Country A would specialize in car production, and Country B would specialize in electronics production.
The concept of comparative advantage, based on supply conditions only, suggests that each country should focus on the production of goods in which they are most efficient, and then they can trade those goods to benefit both countries. This is because specialization leads to increased overall production efficiency and lower costs, resulting in more goods available to consumers at lower prices.
Now, let’s examine why the other options are not correct:
b. Demand Conditions Only:
This option implies that comparative advantage is solely determined by demand conditions when tastes are identical between countries. However, this contradicts the traditional economic theory of comparative advantage.
Comparative advantage is primarily based on differences in supply conditions, such as the availability of resources, technology, and production efficiency. While demand conditions can influence trade volumes and price levels, they do not determine comparative advantage.
c. Supply and Demand Conditions:
This option suggests that both supply and demand conditions determine comparative advantage. While both supply and demand are essential factors in trade, when tastes are identical between countries, the primary driver of comparative advantage is supply conditions.
This is because when tastes are the same, it’s the differences in production efficiency and cost that guide specialization and trade, rather than variations in consumer preferences.
d. Can’t Tell Without More Information:
This option implies that more information is needed to determine the basis of comparative advantage when tastes are identical. However, in the context of identical tastes between countries, economic theory is clear that supply conditions alone determine comparative advantage. No additional information is required to make this determination.
In summary, when tastes are identical between countries, comparative advantage is determined by supply conditions only. The decision to specialize and trade is driven by differences in the efficiency and cost of production, rather than variations in consumer preferences.
The other options are not correct because they either ignore the core principle of comparative advantage (option b) or introduce unnecessary complexity (option c and d) in a scenario where the concept is straightforward.