Explain the factors that might cause a country’s comparative advantage to shift over time
Singapore ranks among the world’s most competitive economies. The government actively supports businesses by helping them boost productivity, enhance their capabilities, and expand into new markets.
a. Explain the factors that might cause a country’s comparative advantage to shift over time. [10]
Introduction
A country is said to possess a comparative advantage in the production of a particular good if it can produce that good at a lower opportunity cost relative to another good, when compared to other countries. This concept is central to the theory of international trade and underpins the rationale for specialisation and exchange. However, comparative advantage is not fixed. Over time, shifts in opportunity costs arising from changes in technology, wages, natural resource availability, and other structural developments can cause a country’s comparative advantage to evolve.
Technological Change
One of the most significant drivers of shifts in comparative advantage is technological progress. Technological advancements can lower the opportunity cost of producing a particular good, thereby giving the innovating country a new comparative advantage. For example, in recent decades, the United States has developed sophisticated technologies in the extraction of shale oil and gas, including hydraulic fracturing and horizontal drilling. These advancements dramatically reduced the cost of production in the energy sector, allowing the U.S. to produce oil and gas more efficiently than before. As a result, the U.S. shifted from being a net importer to a major exporter of energy products, gaining a comparative advantage in this domain.
This shift occurred because the U.S. was able to deploy capital-intensive and skill-intensive techniques effectively, taking advantage of its abundant capital and skilled labour. The opportunity cost of producing energy fell relative to other goods, encouraging a reallocation of resources towards energy production. This example illustrates how countries can reshape their production profiles when technological change alters the relative productivity of factors of production.
Rising Wages and Changing Cost Structures
A second factor that can alter comparative advantage is a change in wage levels. As wages increase in an economy, particularly in sectors that are labour-intensive, the cost of producing such goods rises. This makes them less competitive internationally and may result in the loss of comparative advantage.
A case in point is Singapore’s historical experience with the hard disk drive (HDD) manufacturing industry. In the 1980s and 1990s, Singapore was one of the world’s leading HDD manufacturers, benefiting from a relatively low-cost and educated labour force. However, as Singapore progressed economically, wages rose substantially. This increase in labour costs raised the opportunity cost of continuing to produce HDDs, especially when compared to other higher value-added sectors such as pharmaceuticals or advanced manufacturing. Consequently, Singapore lost its comparative advantage in HDD manufacturing, and this industry gradually relocated to countries like China, Thailand, and the Philippines, where labour remained more affordable.
This process reflects the dynamic nature of comparative advantage and underscores how economic development itself can trigger structural shifts in a country’s specialisation pattern.
Depletion of Resources and Climate Change
Natural factors such as resource depletion and climate change can also influence a country's comparative advantage. When non-renewable resources such as oil, coal, or rare earth metals become scarcer, the cost of extracting or using them increases. This raises the opportunity cost of producing resource-dependent goods. For instance, a country that once enjoyed abundant mineral deposits may see its comparative advantage in mining diminish as these resources are exhausted. In such situations, the country may be compelled to shift towards producing services or manufactured goods instead.
Similarly, climate change has the potential to disrupt agricultural production. For example, prolonged droughts, rising temperatures, or changing rainfall patterns can reduce crop yields, making agriculture less viable in regions that were previously productive. This affects the opportunity cost of land use. In response, some economies may pivot away from agriculture towards alternative uses of land, such as ecotourism or renewable energy generation (e.g. solar farms), where the new comparative advantage may lie.
Conclusion
In conclusion, comparative advantage is not a static condition but a dynamic one, shaped by shifts in economic, technological, demographic, and environmental conditions. Technological advancements can dramatically lower opportunity costs and create new areas of specialisation. Rising wages and economic development may force countries to abandon labour-intensive industries in favour of more capital- or skill-intensive sectors. Meanwhile, resource depletion and climate change can render once-advantageous sectors less viable, prompting structural transformation. For highly open and forward-looking economies like Singapore, recognising and adapting to these changes is crucial in sustaining long-term competitiveness and securing new comparative advantages in an ever-changing global economy.
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