Question

In this chapter we really got into comparative advantage and gains from trade. We highlighted the benefit of trade, and showed that it works BOTH on the micro (individual) and macro (economy) level. Often the discussion of free trade is contrasted by comparing to its logical opposite, "protectionism". "Protectionism" is an idea that certain domestic industries should be protected (from new products or foreign producers) in order to ensure that their employees aren't negatively impacted. Those who favor protectionism have very good intent, but it is almost universally viewed as bad for economic welfare by professional economists.

There are multiple factors at work here. First, there's a concept called "Creative Destruction". Creative Destruction is the concept that new technology disrupts the existing model so much that old industries will be replaced with new industries. (Think the automobile industry destroying the horse and horse related business, the computer destroying the typewriter, the digital camera destroying film, Streaming video replacing VHS, etc). The creation of the new improved product DOES displace those who are in the old industry. It IS harmful to those impacted. However, there is clearly a benefit from the newer, improved product to society as a whole. With each evolution, societal welfare has improved, but it costs some their jobs (until they can be retrained and utilized elsewhere). Both trade and creative destruction causes a reorganization of resources and people. It's destructive, but powerful.

Question #1)

If you were an economic advisor, briefly (one paragraph) explain which of the following would be your primary economic goal: Protecting existing jobs and industries or improving societal welfare? How could you economically explain your position?  

Watch this 3-minute Video on Creative Destruction.

Identify a market that has been fundamentally changed due to creative destruction (not one mentioned in the video). Explain how the negative impacts are often more visible than the positive impacts.  

Answer 1

My goal will be improving social welfare. The reason is that it's increases welfare of society in general. Even though some jobs are lost but when each country exports are based on factor abundance and comparative advantage the income of relatively abundant will increase more than those who loose income. According to stopler Samuelson theorem income of nations abundant factor will increase and that of scare factor will fall. By appropriate redistribution policies the welfare of these scare factors will increase and still gainers will have some gains left. Not only that, consumers will gain by lower cost of production

Production of cloth have fundamentally changed due to creative destruction. Handlooms have been replaced by power looms. The negative effects of loss of jobs in cloth sector are more visible. But gains to society like fall in prices of cloth for general masses are more than loss. Masses didn't have much cloth before power looms as it were scare scare and costly. Now masses have more cloth and they purchase it at lower costs.