What is meant by static comparative advantage? How can it hinder an economy from diversifying into new industries?

Comparative Advantage: The ability of an individual, company, or country to produce a particular good or service at a lower opportunity cost than other producers.

Static Comparative Advantage: A country's current abilities to produce a particular good or service more efficiently than its other goods and services, or more efficiently than other countries.

Economic Diversification: The process by which an economy expands the range of its economic activities and outputs, often to reduce its reliance on a particular sector or industry.

Static comparative advantage refers to the advantage a country has in the production of a good or service at a particular point in time, given the existing resources, technology, and production conditions. It's "static" because it does not account for changes over time in response to innovation, economic development, or shifts in global markets.

While static comparative advantage can lead to economic gains through specialisation and trade, it can potentially hinder economic diversification. This is because an economy might become too reliant on a specific industry in which it has a comparative advantage, and neglect to develop other industries. This over-reliance can expose the economy to shocks related to that industry, such as price volatility in global markets or depletion of natural resources.

Saudi Arabia and Oil: Saudi Arabia has a static comparative advantage in oil production due to its abundant natural reserves. However, this has made the Saudi economy heavily reliant on oil revenues, contributing to economic volatility. To mitigate this, the government has launched Vision 2030, aiming to diversify the economy away from oil.

Nigeria and Oil: Nigeria, Africa's largest oil producer, is another example of an economy that's heavily reliant on one industry due to its comparative advantage. Despite the wealth oil brings, it has hindered the development of other sectors of the economy, leading to economic instability due to fluctuating oil prices.

A fall in the prices of exports decreases the demand for the pound as less of the currency is required by foreign buyers to purchase the same quantity of goods. This leads to a depreciation in the value of the pound and a worsening of the terms of trade, as exports become cheaper and imports become more expensive. Real-world examples include the impact of Brexit on the value of the pound and the impact of oil prices on the value of the Russian Ruble. This topic falls under macroeconomics, with specific relevance to exchange rates and international trade.