Question

1. Take a closer look at our local economy or a country of your interest and pick a good or a service that you believe America (or your country of choice) has a comparative advantage in producing. Discuss the factors that you believe give America (or your country of choice) such an advantage. 2. In addition, which is better for a country—to export more or to import more? 3. Moreover, what is the impact of trade surplus (exporting more than importing) and trade deficit (importing more than exporting) on GDP, employment, and the exchange rate of the country's currency?

Answer 1

1) Let us consider Indian economy. India is one of the major producers of rice. India has comparative advantage in production of rice as there is abundant supply of labor in this country. Here, labor is the major factor of production.

2) As the country got comparative in the production of rice, it is better for the country to export more and import less. This is because by exporting more , there will be increase in revenues of the economy. Also, due to increase in net exports, GDP rises.

3) If there is trade surplus , i.e., exports are greater than imports, there will be increase in net exports. As a result, there is increase in GDP of the economy. Due to growth in GDP, level of production of rise and thereby, requirement of labor rises. Hence, employment will rise. Also, there is higher demand for domestic currency in the foreign market as a result, higher inflow of foreign currencies into the economy. Thus, the domestic currency appreciates or strengthens.Suppose initially rice is exported from India to American and exchange rate is 1$=72 Indian Rupees. If there is trade surplus then exchange rate becomes 1$=70 Indian Rupees. In case of trade deficits, reverse phenomenon occurs. Due to trade deficit, imports are greater than exports, so, GDP of the economy falls As a result, production falls as well as the level of employment. In this case, there is higher demand for foreign currency, and domestic currency depreciates or weakens. Exchange rate increases to (say) 1$=75 Indian rupees.