Question

In the 1990’s, civil war erupted is Bosnia. The war led to the destruction of natural resources and capital and caused casualties that decreased the supply of the labor for the production of consumer goods and capital goods. Illustrate the impact of the war on Bosnia’s production possibilities curve for consumer goods and capital goods.

In response to Iraq’s invasion of Kuwait in 1990, the United States and its allies imposed trade and financial sanctions on Iraq. Imports of Iraq oil were terminated as were exports of machinery, parts, and the like to Iraq. Bank loans to Iraq and business investment in Iraq were curve for textiles and oil. Under what conditions would sanctions have been most likely to cause Iraq to withdra from Kuwait?

Answer 1

In the economy of Bosnia, there was a destruction of natural resources and capital with decreased the supply of the labor. This implies that the possible combinations of the consumer goods and capital goods that implies there must be a shift of the PPC inside for both these goods. As it is known that PPC is drawn for possible production combination based on a nation's ability to use its resources (technology) and the availability of resources. Here resources are reduced so both the goods will experience a reduction in their maximum production. Hence PPC shift is no biased and is same for both the goods.

Economic sanctions are tools of foreign policy that imposes severe restrictions on the opponent's amount of trade. The victim country faces a fall in the growth of its trade, industry and manufacturing. A retaliation is apossible when the imposing nation is not powerful enough to carry economic sanctions wisely. Most of the time, the imposing nation is a dominating one against which the victim country is afraid of retaliation.

Hence, the sanctions would have been most likely to cause Iraq to withdra from Kuwait, if the sanctions were credible so that the imposing nations had other sources of trade the same good. A credible sanction is what a country needs to impose. This credibility can be provided when several nations implement an economic sanction and force the nation to produce less than what it can produce according to its PPC (inside the PPC). Since sanctions also bans exports, the nation is neither able to receive (a variety of goods) nor is able to earn revenue from exports and so, it suffers multifold.