Question

At one time, most of the cars produced in Mexico were sold in Mexico. Today, however, Mexico both exports and imports cars. What is a plausible explanation for this observation? How could comparative advantage explain this scenario?

Answer 1

Answer:

Mexico either specialized in the production of high end cars which it exports, while it imports low end cars for its domestic market. Since Mexico is a developing country, most of the cars sold domestically will be low end cars.

Countries manufacture and export the goods which they can produce at a lower opportunity cost since they have a comparative advantage in their production. Mexico probably has a comparative advantage in the production of high end cars (specially vs. the US) which generate higher revenues.