(a) Static Comparative Advantage (Differences in Factor Endowments)
At any point in time (i.e. static) differences in comparative advantage between countries arises because of differences in factor endowments i.e. differences in the quantity or quality of factors of production.
Such factor endowments can be in terms of
(1) Natural resources (e.g. climate, arable land, forests, or fishing grounds)
(2) Human resources (e.g. skilled and unskilled labour)
(3) Capital stock (e.g. infrastructure like transportation systems, utilities, and communications)
(4) Technological capabilities
Such differences in factor endowments persist because resources are not perfectly mobile internationally. For example, natural resources are totally immobile while the international mobility of labour resources is partially limited by relocation costs as well as immigration restrictions. Similarly, international mobility of capital and technology may also be limited by regulations that deter financial inflows and foreign direct investments (FDI).
Differences in factor endowments lead to differing factor prices which in turn affect the prices of goods and services produced by different countries. As such, countries typically specialize in producing goods that require factors in which they are relatively abundant in as they are able produce such goods more efficiently (i.e. at a lower opportunity cost) than countries which are less endowed with such factors. Countries then trade these goods and services for other goods and services which they are able to produce less efficiently.
For example, a developing country that is abundant in unskilled labour (e.g. Pakistan) is likely to specialize in and export labour intensive products (e.g. textiles) in exchange for imports of capital and technology intensive products (e.g. motor vehicles) from a capital and technology abundant developed country (e.g. South Korea).
(b) Dynamic Comparative Advantage (Resource endowments can change over time)
Ricardo’s theory of comparative advantage assumes that resource endowments are static. This theory does not account for the fact that additional resources can be created through sustained investments in labour, capital, and technology. For example:
Capital can be accumulated if savings are channelled to the production or import of capital goods,
Skills of workers can be raised through education and training
Technology can also be improved through domestic research and development or by directly purchasing such technology from more advanced countries
Comparative advantage is therefore not static but dynamic because countries can develop comparative advantage in producing higher value products which are capital, skill and technologically intensive with sustained investments in such areas.
The Japanese were among the first to recognize that comparative advantage in a particular industry can be created by the government through targeted investments in labour, capital and technology. Rising from, devastation of World War II, Japan within a few decades rose to become the technological powerhouse that we know today, producing capital and technology intensive goods like electronic consumer durables and automobiles and in the process dominating global markets of such goods from the 1970s to early 2000s. Their industrial policies were emulated by other countries like South Korea, which has in many products and countries taken over Japan as the market leader (e.g. Samsung and LG in mobile devices and consumer and household electronics).