Question

a) With the aid of a consumption function, highlight the main determinants of consumption.

b) “International trade is beneficial to developing countries.” Do you agree? Discuss your arguments with the support of at least one international trade theory.

c) As a trade specialist, outline the policies which the government can use to promote international trade.

Answer 1

Part-1) The consumption function is : C = A + MD; where C means the consumer spending; A means autonomous consumption; D means real disposable income; and M means marginal propensity to consume. In economics, the consumption function refers to the relationship between consumer spending and the several factors determining it such as wealth, income, expectations about the level and riskiness of future wealth or income, age, rate of interest, family size, and education.

Part-2) YES, in my opinion the international trade bring benefits to developing countries. Developing country workers are often paid less than the United States minimum wage but still globalization has made low-income countries better as have been given good life alternatives. It increases their average income. Moreover with trade, the wage rate will increase in developing countries and decline in developed countries thus will bring equality. Production is increasingly specialised and develops deeper relationships among markets across borders enable and encourage producers and consumers to reap the gains of economies of scale. Due to globalisation the vendors face greater competition from foreign firms which reduces monopoly gains and incentivize businesses to seek cost-reducing improvements and innovations in what they sell these results to an improvement in dynamic efficiency.

Adam Smith and David Ricardo both argued in favor of free trade. Ricardo argued in favour of free trade and industry specialisation with the comparative advantage as it produces positive results. The specialization theory was devised by Adam Smith. Adam Smith’s theory of the division of labor created the basics of modern economics. It save labor time and improves efficiency. Division of labor involved in the production of a particular product also result to increased productivity. It helps in creating a market between other countries i.e. free trade. Today specialization can be seen in companies and businesses. Adam Smith's invisible hand theory is relevant in globalisation because the philosophies of wealth accumulation and the free market are relevant now as many countries embrace it through liberal growth of economy. Furthermore entrepreneurs choose for the highest rate of profit, and consumers choose for the lowest price, thus in general economic well-being is increased.

As per policy we have to answer first question, I have answered more than it