Question

INTERNATIONAL ECONOMICS

2. If a country has market power in trade, then effectively it can set as high a tariff as it please and will always be better off. With reference to theory covered in the course, evaluate this statement.

Answer 1

When a country produces a good or service for a lower cost of production than other countries, the comparative advantage is. A trade-off is a calculation of opportunity cost. A nation with a comparative advantage is worth the trade-off. Buying their product or service benefits outweigh the disadvantages. When manufacturing it, the nation may not be the best. But for other countries, the product or service has a low cost of opportunity to import.

Of example, oil-producing nations have a comparative advantage in chemicals.1 Compared to countries without it, their local oil provides a cheap source of material of chemicals. In the process of oil distillery, many of the raw ingredients are made. As a result, U.S. chemical production firms compete with Saudi Arabia, Kuwait, and Mexico. Their chemicals are cheap, making the cost of their opportunity low.

The example is the call centers of India. The system is used by U.S. companies because it is easier than finding the American call center. Call centers in India are no better than call centers in the U.S. Their staff are not always very consistent in speaking English. Yet they offer the service cheaply enough to make it worth the tradeoff. In the past, there have been more competitive advantages over products and less in services. That's because selling goods is simpler. Yet telecommunications infrastructure such as the Internet allows the export of services. Other services include call centres, banking, and entertainment services.

A nation with a comparative advantage channels its money, labor, and natural resources into products that require lower costs of opportunity and higher margins of income.
Trade protectionism protects sectors that are inefficient. This causes money to be squandered on non-competitive growth. This is contrary to the grain of the concept of comparative advantage.