Question

In: Economics

Answer the following questions with short paragraphs. Use economic reasoning to defend it. Make sure to...

Answer the following questions with short paragraphs. Use economic reasoning to defend it. Make sure to answer all parts!

How can international trade enhance economic efficiency? How can immigration enhance economic efficiency? Who might be made worse off because of international trade and/or immigration?

Solutions

Expert Solution

Economic efficiency means the situation where the maximum utility/production level can be achieved for a given cost or we can say where for a given level of utility/production minimum cost is incurred.

Hence economic efficiency requires that one must produce something he is best at and one must not produce something which can be produced by someone at a cheaper cost. only then maximum amount of production will take place for the given limited resources. Let's say I can produce 2 bananas or 1 apple per hour and My friend produces 1banana or 2 apples per hour. If we are given 2 hours I can produce 2 bananas+1 apple and My friend will produce 1banana and 2 apples if we devote 1 hour each to producing only one fruit. total production in this case will be 3 bananas and 3 apples .But we can see I am better at producing bananas than my friends does in 1 hour and He is better at producing apples per hour. If we specialise (I produce only banana and he produces apples) we can produce total of 4banaas and 4 apples(which is more than 3 apples and 3 bananas) and if we exchange with the rate of 1banana=1 apple, I can have 3bananas and 1 aapple and he can have 4 apples and 1 banana. We are better off than the previous situation hence if we think of this in the big picture one country must produce something they can produce at a cheaper cost than the rest of the world. But this will lead to not producing some stuff that is required by its people. hence this will facilitate trade and all the countries will be better off and total production of the world will go up and hence economic efficiency increases. this is how international trade enhances economic efficiency.

In a labour deficient country, the wage of the labours are very high and this leads to more cost in the production and hence production level is low for a given cost, But in a country where labours are abundant the wage for the labour are very less and some of the workers may not find any kind of work and this will lead to social issues which may increase the government needs of law and hence cost of maintaining law and order will go up. here if labour from the surplus country migrates to the deficient country the wage will go down and the production of that country will go up. But in the abundant country the production won't come down because the workers who only couldn't find work will migrate to the deficient country. Hence the total level of production will go up and the costs are minimised. Hence immigration will lead to the enhancement of economic efficiency.

Due to immigration and international trade these two groups of people may be worse off:

1. Domestic workers: we can see before immigration wages were very high in the labour deficient country but after immigration the wage went down. Hence the domestic workers will be worse off.

2. domestic producers: due to increase supply due to imports the price of a particular good in a market may go down which will reduce the profit of the domestic producers hence they will also be worse off.

(you can ignore the underlined part to minimise the word count, but this is given for better expliniantion of the phenomenon of the comparative advantage)

Thanks. Have a good day ahead.


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