North Dakota could produce bananas if it really wanted to. Build some greenhouses and bananas will grow. Dole meets Fargo! But at what cost? Common sense tells us that North Dakota should buy bananas from countries like Costa Rica.
Why? Costa Rica has a “comparative advantage” over North Dakota in growing bananas. With cheap labor and abundant sunshine, Costa Rica almost certainly can provide North Dakota with cheaper bananas. Most should agree North Dakota should buy its bananas from countries with warm climates and concentrate on activities for which it holds a comparative advantage, like producing oil.
Other examples of comparative advantages are less clear. Let’s look at one such example that loomed large in the last Presidential election: U.S. automakers choices about where to locate plants. In theory, this too should be governed by the principle of comparative advantage. In practice, however, it’s more complex. Let’s have a look.