The example of the car and truck production in Norway and Costa Rica is a good illustration of economic factors such as comparative advantage, absolute advantage and the factor endowment theorem. Norway has a high absolute advantage in car production. This is because it has a higher production capacity of 20 cars in one hour if it decides to produce cars only. Therefore, it produces the cars at a lower cost than Costa Rica because it will have economies of scale in its production.
Costa Rica has a higher absolute advantage than Norway in truck production. This is because, in Costa Rica, 15 trucks are made in an hour compared to Norway where 20 trucks are made. The fact that Costa Rica can produce trucks thrice the number of cars produced in an hour proves that the cost of producing trucks is less than in Norway.
Norway has a higher comparative advantage in car production than Costa Rica. This is because it can produce double the number of cars produced in Costa Rica in one hour. Furthermore, if Norway concentrates on car production alone, it produces 20 cars, which is double the amount it makes when it also produces cars. Costa Rica has a comparative advantage in truck production because they can produce triple the number of cars in one hour. This means that their cost of producing trucks is less than Norway’s, and they also find it profitable to produce trucks than cars.
Countries specialize in production because they want to maximize their productivity using the least possible costs. Therefore, they specialize in producing products whole raw materials are readily available at low costs. The reason why Costa Rica has a higher absolute advantage in truck production compared to Norway is because of the endowment. Costa Rica could be well endowed with the material used to make trucks hence; they can produce more trucks because of low costs and readily available material.
References
Baumol, W. J., & Blinder, A. S. (2011). Macroeconomics: Principles & Policy (12 ed.). London: Cengage Learning.
Carbaugh, R. J. (2010). 20090 International Economics (12th Edition ed.). Mason, Ohio: Cengage Learning.
