Discuss the theory of comparitive advantage...?
David Ricardo, a 19th Century Englishman, formulated the theory of comparative advantage, regarding foreign trade. What role does comparative advantage hold in foreign trade? Discuss the kinds of protectionist policies, which nations can use to restrain trade with other countries. How do they work? What is their impact?
Answer:
In simplified terms, comparative advantage is the theory that if I can do X more effectively than you can do X, and if you can do Y more effectively than I can do Y, I will trade X to you for Y.
Trade has led to the specialization of national industries. For example, within the EU, France specializes in agriculture while Germany specializes in heavy machinery. As comparative advantages change, specializations should also change.
Protectionist policies include tariffs, quotas, and subsidies. From my point of view, Tariffs are taxes on imports, which effectively make it such that it doesn't seem that you produce Y quite so much more effectively than me to my people. Quotas increase the price like a Tariff would but through artificial scarcity, and thus has a similar effect as a Tariff. Subsidies are provided to my own struggling industries, which effectively makes it seem to me that I produce Y a little better, so it doesn't seem as if you produce Y so much more effectively than me to my people.
The impact of these trade barriers is two-fold. The first is the cost to my society, which no longer imports Y cheaply. The second is a slight reduction in risk, which Y is produced domestically so in the case of trade embargoes my society will still have Y. This latter benefit to protectionism is largely restricted to national defense related industries.
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Answer:
In simplified terms, comparative advantage is the theory that if I can do X more effectively than you can do X, and if you can do Y more effectively than I can do Y, I will trade X to you for Y.
Trade has led to the specialization of national industries. For example, within the EU, France specializes in agriculture while Germany specializes in heavy machinery. As comparative advantages change, specializations should also change.
Protectionist policies include tariffs, quotas, and subsidies. From my point of view, Tariffs are taxes on imports, which effectively make it such that it doesn't seem that you produce Y quite so much more effectively than me to my people. Quotas increase the price like a Tariff would but through artificial scarcity, and thus has a similar effect as a Tariff. Subsidies are provided to my own struggling industries, which effectively makes it seem to me that I produce Y a little better, so it doesn't seem as if you produce Y so much more effectively than me to my people.
The impact of these trade barriers is two-fold. The first is the cost to my society, which no longer imports Y cheaply. The second is a slight reduction in risk, which Y is produced domestically so in the case of trade embargoes my society will still have Y. This latter benefit to protectionism is largely restricted to national defense related industries.
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