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Developing or poorer countries cannot expect to engage gainfully in international trade because they won’t be able to compete with advanced countries which have much higher levels of productivity and more skills and better technology
“Developing or poorer countries cannot expect to engage gainfully in international trade because they won’t be able to compete with advanced countries which have much higher levels of productivity and more skills and better technology”- Using the theory of comparative advantage consider how far you agree with this statement.NOTE – DETAILS RE. THIS ASSIGNMENT ARE IN THE HANDBOOK.
This is a very “high level” framework as to how the first option for the assignment could be approached- there may be other valid ways of answering this question and you will certainly earn more marks by adding detail.(Remember, also, the importance of noting all references in the text, e.g. “Productivity levels are often more than ten times higher in developed countries compared to developing” (Smith, 1982), along with the references spelt out in the bibliography at the end- e.g. T. Smith 1982, Review of the World Economy and Other Things, OECD Publishing, Paris. Plagiarism will be noted and penalised- please note, I treat unattributed repetition of material in the lecture slides as plagiarism, I’ll supply a separate Note about what plagiarism and how to avoid it).
1. As part of an introduction note that it is indeed true that levels of productivity (output per worker, or output per hour worked) are much lower. Also, developing countries characterised by lower levels of skills and technology. (Can you find any evidence for these points?)
2. Rehearse some of the strands of the anti-free trade argument which are suggested by the quotation,e.g.– The developing countries (e.g. in S. America, Africa, S Asia) not likely to be able to compete because output per head so low.– Also, not likely to be able to compete because technology and skills relatively weak.– The economist Prebisch in the 1950s made this point in the 1950s that the developing countries were so far behind that they would never be able to prosper in the free trade context (and this is why he argued for IS).3. And, note also the importance of the fact that in the very early days of economic trade theory, Adam Smith (writing in 1776) argued that countries should specialise according to where they had ABSOLUTE advantage- of course, the developing countries are not likely to have absolute advantage in many if any sectors.4. BUT, and this is where you (rightly) begin to critically evaluate the quotation, there is also comparative advantage.
– Give a brief definition of it- note how it differs from absolute advantage (very importantly, a country will always have comparative advantage in something).– This approach to trade theory was developed several decades after Adam Smith by Ricardo (in 1817).– You then need to demonstrate how specialisation according to comparative advantage leads to a situation where the total output of the trading countries is maximised- no country is any worse off and conceivably they will all be better off (although, and it is an “extreme outcome” is theoretically possible that all the gains would fall to one country- but even then the rest are not worse off then before…).– There are various approaches (the more you use and show, probably the better your mark):– E.g. the first lecture re. gains from trade in a “simple” Ricardian 2 country, 2 product model.– E.g. the diagrams with production possibility frontiers and HOT, Lecture 2 with no trade and then Lecture 2 equilibrium with trade (have moved to higher indifference curve).
5. In concluding should probably note that whilst CA theory does provide a serious criticism of the quotation, the case is NOT totally conclusive. There are number of reasons why the developing country (say South Korea in the 1950s or Mozambique today) might not wish to simply “sit” in the position of its comparative advantage- what are some of those reasons? (clues- something about income distribution and trade, something about how CA is not simply a “given”, it can be changed …)
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