Question

5. Peter Pundit, an economics reporter, states that the European Union (EU) is increasing its productivity very rapidly in all industries. He claims that this pro- ductivity advance is so rapid that output from the EU in these industries will soon exceed that of the United States and, as a result, the United States will no longer benefit from trade with the EU. a. Do you think Peter Pundit is correct or not? If not, what do you think is the source of his mistake? b. If the EU and the United States continue to trade, what do you think will characterize the goods that the EU sells to the United States and the goods that the United States sells to the FU?

Answer 1

Part A

No, Peter Pundit is totally incorrect. He creates the confusion between two important terms: comparative advantage and absolute advantage. In spite of EU having absolute advantage in production all products compared to the United States, it is possible for the United States to have comparative advantage in the production of some products. It is better for the United States to continue production of those products. In this way, it is possible to make trade better off between these two nations.

Part B

The goods that the EU exports to the United States should be with the EU’s comparative advantage in their production. In the same way, the goods that the United States exports to EU should be with the United States’ comparative advantage in their production.