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Home > Economics FAQs Blogs > Could you clarify what it means when the theory of comparative advantage assumes factors of production are transferable and mobile within economies but are fixed and immobile between economies?

Could you clarify what it means when the theory of comparative advantage assumes factors of production are transferable and mobile within economies but are fixed and immobile between economies?

Relevant Topics

This question pertains to topics in Microeconomics and Macroeconomics, such as Comparative Advantage, International Trade, Production Factors

Definitions:

Comparative Advantage: This is an economic theory that states that countries should specialise in producing and exporting goods and services in which they have a lower opportunity cost, and import those in which they have a comparative disadvantage.

Factors of Production: These are the inputs used in the production of goods or services, traditionally classified into four categories: Land, Labour, Capital, and Entrepreneurship.

Detailed Explanation:

The theory of comparative advantage makes two key assumptions about the mobility of factors of production:

Within Economies (Transferable): Factors of production are perfectly mobile within a country. This means that resources can be freely moved from producing one good or service to another without any restrictions or costs. For example, workers can switch industries, capital equipment can be repurposed, etc.

Between Economies (Immobile): Factors of production are immobile between countries.
 
This means that resources cannot move freely across national borders. For instance, labour cannot migrate freely due to immigration laws, and there might be restrictions on the international movement of capital.

These assumptions simplify the model of comparative advantage and allow it to focus on the opportunity costs of production as the determinant of trade patterns. However, in reality, there can be significant costs and restrictions associated with moving resources even within a country, and some resources can move internationally.

Recent: 

Labour Mobility in the EU: Before Brexit, the European Union allowed for relatively high mobility of labour between member countries, contradicting the traditional assumption of immobility between economies. Nevertheless, even within this context, barriers remained such as language differences and recognition of qualifications.

Silicon Valley: The rapid development and dominance of Silicon Valley in the tech industry exemplify high factor mobility within a country. Resources (including labour and capital) were readily attracted and reallocated to the booming tech sector.

Summary:

The theory of comparative advantage assumes factors of production are perfectly mobile within an economy and immobile between economies. This means resources can freely switch between industries within a country but cannot move freely across borders. Examples include labour mobility in the EU and resource reallocation in Silicon Valley. This topic intersects both microeconomics, in considering individual firms' production decisions, and macroeconomics, in contemplating the larger effects on national economies and international trade.

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