globalisation

Question 1

what is CA and what is the theory of CA

Answer 1

• a country has CA when it can produce a good at a lower opp cost than another country
• theory of CA: countries can gain from trade if there are differences in opp costs of producing specific goods

Question 2

what are the sources of CA

Answer 2

differences in factor endowments
- differences in CELL
- differences in relative prices of FOP
- affects relative prices of g&s
- countries can specialise in producing goods which use FOP that they have abundant suppply of and can produce at a lower opp cost, trade for goods that require higher opp cost
- e.g. SG: CA in producing capital intensive goods, exports machinery and equiment such as computer parts

differences in tech
- diff countries have diff intensities of R&D
- economies which are able to adopt more advanced tech are able to combine FOP to produce more efficiently and at lower opp cost

Question 3

what is dynamic CA and what are the reasons (??)

Answer 3

dynamic CA is a country’s CA changing over time due to changes in factor endowments or tech

depletion of factor endowments
when FOP has been depleted, opp cost for that country would change which affects the country’s CA

e.g. China’s arable farm land has been depleted –> no longer able to produce the same amt of food –> production possibility decreases –> more resources must be sacrificed and reallocated to produce food –> opp cost of producing food increases –> lost its CA in producing food as compared to another country

technological advancement
tech breakthrough or progress with new inventions –> affect country’s production possibilty as countries are now able to combine FOP more effeciently

e.g. Finland’s Nokia used to be leader in mobile phone tech. with the advancement of smartphone tech, US and SK have reduced their opp cost in producing a phone –> gain CA in comparison with Finland

Question 4

what are the reasons for protectionism

Answer 4

1) correct BOT deficit
- BOT deficit: imports > exports
- reduce import expenditure by restricting imports or subsidising local producers

limitation: can only be short term measure. in the long run, better to examine root cause of the trade deficit. more sustainable method is to improve competitiveness/use other policies

2) promote EG and reduce unemployment
- by restricting qty of imports, imports more expensive
- consumer switch to relatively cheaper domestic goods. assuming PED > 1, (X-M) increases, AD increases, derived demand for FOP such as labour increases
- fall in unemployment

limitation: due to reduced competition, firms have less incentive to be more efficient –> higher costs –> passed on to consumers in terms of higher prices