Question

In economics, we learn about production and relationship between input and output through a simple production function with two factors of production, namely, labor and capital. As simple as it is, this equation is very useful for both understanding and studying the dynamics of economic growth. For example, if we assume the production function of the whole economy is Q = f (K, L), where K is the economy’s stock of capital, L is employed labor and Q is the economy’s output, an increase in either labor or capital or both would lead to the growth of the output. We can also grow the economy by increasing labor productivity; that is the amount of output produced by one unit of labor during one production cycle. Following the 2008 financial crisis, which led to a partial collapse of the US financial system, the US economy, as well as the economies of many other countries, went into a severe recession. Although most of these economies have been recovering, the wages of the middle-class income groups in most industrial countries have not been increasing much. In fact, in the US, for example, from the mid-1980s until very recently wages stagnated, and the wage increases of the past two years have been very modest and hardly kept up with inflation. This has resulted in some level of discontent about the state of the economy in most industrial countries. Some observers attribute this structural changes caused by free trade and globalization and technological automation. As a result in some countries, including the United States, sentiments against free trade and globalization seem to be on the rise. President Trump's trade policies appear to be reflective of such sentiments. Do you agree that we should restrict trade and adopt protectionist policies and, possibly, discourage the development of automation technologies to protect middle-class jobs? Do you think such policies would lead to higher wages? Please do not copy from other posts.

Answer 1

Key points in the case given:1. Economic growth is considered to be a function of labor and capital. If capital or labor numbers or productivity increases then economy grows. Of late, economic growths are not corresponding to increase in wages.Observers have opinion that these structural changes are caused by free trade and globalization and technological automation. Hence there is discontent about globalization and technology.

Do you agree that we should restrict trade and adopt protectionist policies and, possibly, discourage the development of automation technologies to protect middle-class jobs? Do you think such policies would lead to higher wages?

Answer: In my opinion no. We should not restrict trade and adopt protectionist policies. I consider following points when I say so.

1. Technology change has always been there. People constantly need to upgrade their skills more often. Gone are the days when individual join and retire from the same organization. Product life cycles are short now. New technology brings new types of jobs as well.

e.g. Driverless cars will create jobs in servicing of these cars even when drivers become jobless.

2. it is also a fact that technology change in one type of product may impact the other type. E.g Mobile cameras and camera making companies.

3. Protectionism will only make resources inefficient. USA put tariff on Chinese goods to which China retaliated. Now there are reports that USA is being worse off after protectionist policies. It will only increase tension.It may not necessarily increase wages as people will not increase budget to buy expensive products and recession will happen.