1. Define comparative advantage.

Comparative advantage exists when one country has the ability to produce a good at a lower cost, relative to other goods, compared to another country. Specializing in producing the goods they are best at producing forms a basis for trade and countries tend to produce and export the goods for which they have a comparative advantage. In the U.S., technology and intellectual property form the basis for comparative advantage.

2. Discuss how producing based on comparative advantage can increase domestic employment in India.

Producing on the basis of comparative advantage means a country will specialize in producing those goods that they can produce at a lower cost than their trading partners can. They will then trade the goods they produce for other goods that their country needs but that can be produced more cheaply in another country. The ability to export their goods to other countries provides an additional market for Indian goods and a derived demand for Indian labor. (Note that in the case of India, the whole process is facilitated by the new movement to modern factories—these new economic zones make the whole scenario possible.)

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