In the example of comparative advantage, why does Japan have lower cost to produce cars?

In the example of comparative advantage, why does Japan have lower cost to produce cars?

• A. Japan exports raw steel instead of finished cars.
• B. Japan imports cars from abroad to reduce costs.
• C. Japan imposes tariffs that raise car costs.
• D. It has an abundance of iron ore and uses it to manufacture steel efficiently.

Answer: (D)

Having an advantage in producing a key input lowers the cost of making downstream goods. In this case, steel is a major input for cars. If Japan has an abundant iron ore supply and a highly efficient steel industry, the cost of producing steel—and thus the cost to assemble cars—drops. That lower input cost means Japan’s overall car production is cheaper relative to other countries, creating a comparative advantage in cars. The other statements don’t explain why car production would be cheaper: exporting raw steel, importing cars, or tariffs don’t reduce the domestic cost of making cars.

Having an advantage in producing a key input lowers the cost of making downstream goods. In this case, steel is a major input for cars. If Japan has an abundant iron ore supply and a highly efficient steel industry, the cost of producing steel—and thus the cost to assemble cars—drops. That lower input cost means Japan’s overall car production is cheaper relative to other countries, creating a comparative advantage in cars. The other statements don’t explain why car production would be cheaper: exporting raw steel, importing cars, or tariffs don’t reduce the domestic cost of making cars.