Assume that the world consists of two countries. One country (call it Hiland) has a strong...

Assume that the world consists of two countries. One country (call it Hiland) has a strong legal system for contract enforcement, and the other country (call it Loland) has a legal system in which enforcement of contracts is uncertain, slow, and costly. In other ways the two countries are quite similaa)

a) What do you predict about the pattern of trade in final goods between these two countries? Explain.

b) Based on the above, what can you conclude about regulation (in general), comparative advantage, and thus trade patterns? Explain.

Solutions

Expert Solution

a. Hiland is a country in which there is strong legal system for enforcement of trade contracts. This will helps in creating new opportunities for industries and facilitate the production activity of high quality goods and services which would be traded in different countries. This also contributes a lot in the economic growth of the country. Therefore, in this country’s trade pattern would support global growth and trading.

On the other hand, the loland country where the enforcement of legal trade agreements or contracts is slow, uncertain, irregular etc. would face great economic depression and recession in the country. Trading is one of the most important components which ensure the growth of economy of any country.

b. Above explanation shows that the trade pattern in both countries is too different. In one country (hiland), the trading pattern is supportive and has favorable trading conditions to increase trade volume.

Impact of such trade pattern:

1. Increase in trade volume

2. Creating new jobs

3. Improve product quality and variety

4. Economic growth

• Opposite to this, the other country (loland) with weak trading environment implies that the uncertain legal contracts cause a great decline in trade and would negatively affects the investment of the economy.

Impact of such trade pattern:

1. Low investment

2. Less foreign exchange

3. Resists new opportunities

4. Rise in Unemployment

5. No advancement in technology

Rahul Sunny answered 1 year ago

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