Question

In: Economics

If trade is the natural outcome from comparative advantage, why are industrial policies necessary in some...

If trade is the natural outcome from comparative advantage, why are industrial policies necessary in some circumstances? Can we just leave things up to comparative advantage and the free market?

Solutions

Expert Solution

Industrial policies are generally made by the government to ensure the development and growth in all sectors of the economy. Actually industrial policy are helpful because,

1. Productivity in industry is much higher than in agriculture and services. For that it can be helpful for economic growth and can be helpful for reduce poverty.

2. To make the investment in the economy need proper coordination, access to market with proper market rate etc. for that industrial policies are needed.

3. Proper use of human capital like skill, knowledge, is needed for long term economic growth for which industrial policies are needed.

4. To give a level playing field for indigenous or domestic industries and to ensure their development.

Comparative advantage helps in trade and free market which is regulated by itself and not by government, but it can’t ensure profit. To ensure profit need to get advantage in the competitive market which comes through niche strategies, bond loyalty, prices of products, how it different from other etc.

So only the comparative advantage and free market is not enough.       


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