Question

1. The argument based on absolute advantage that free trade between countries is always beneficial for both participating countries is flawed. Explain.

2. Mention two important external shocks that potentially triggered Latin American sovereign debt crisis and the lost decade. Provide some context.

3. What is a common view (seen in class) of contemporary economists on ISI strategies? In particular, what are their views on the initial implementation and on the permanence of the ISI policies?

4. What was the main incentive for multinationals to operate in Latin America during the period of ISI policies? How is the country size related to such an incentive?

Answer 1

1.Adam Smith emphasised specialisation,and countries stand to gain through international trade by specialising the production of goods upon which each of the country has an absolute cost advantage.But the theory seems to have many limitations.The theory assumes the existance of cost advantge on a specific line of production for each country which is not convincing.In the practical economies of the world.there are many economies with less efficient labour and capital and threfore with no superiority in any specific line of production,yet trade benefits them.

The cost advantage is only one among a large number of factors that justify trade between countries,and therefore the theory fails to address the factors that favour trade more comprehensively.Most of the countries engage in trade to maintain the balance of payment accounts, and Adam Smith's assumption of production of surplus and trade as a vent to sell this off,do not stand with the reality.