Question

1. Assume that in Denmark it takes 16 hours to build a Ford minivan and 23 hours in Russia to build a comparable vehicle. Assume also that it takes 6 hours to produce a mobile phone in Denmark and 8 hours to build a similar phone in Russia. According to trade theory, is there a basis for trade between Denmark and Russia?

2. Why might Russia refuse to trade with Denmark, in spite of what trade theory suggests? Give two reasons.

Answer 1

1)According to trade theory, on purely quantity basis, there can be the outsourcing of production from Russia to Denmark since Denmark's production rates are more efficient which leads to less cost of products. Russia can provide the technical details and outsource the manufacturing activities which is subcontracting. Trade theory states that production moves to the country which has competitive advantages in terms of costs. In this case, Denmark has that advantage. Hence, there can be trade between Denmark and Russia purely in the manufacturing sector.

2)The two reasons why Russia might not trade with Denmark are

a)Geopolitical factors -Geopolitical factors such as geographical disputes, trade disputes and political alignments disputes can cause Russia to refuse to trade with Denmark. Trade negotiations can fail and both parties may not arrive at the terms of agreement for trade and hence trade won't happen. Political tensions between countries over different issue can exacerbate to refusal to trade.

b)Protection of domestic industries- Russia may not trade with Denmark to protect its own local industries and people who need employment. If production is outsourced, it will lead to job losses which no country wants.