If a set of countries opens up to trade, is it on average likely to have...

If a set of countries opens up to trade, is it on average likely to have a positive or negative effect on the environment for a given level of income?

Solutions

Expert Solution

When countries open to trade there is most likely be gains from trade where consumption and production efficiencies will arise. Experts and trade economists have developed studies that show three possible effects of trade opening on environment. They are -

1. Scale effect- increase in trade leads to increase in production and distribution which lowers prices. This increases aggregate demand and consumption so GDP too increases. With increase in income there will ve most likely increase in energy usage. If the countries in question use non renewable energy sources like crude or coal, it will lead to greater emissions and environmental degradation. Scale effect implies environment will deteriorate.

2. Composition effect- Opening trade creates specialization and division of labour which in turn changes the existing production mix. If suppose textile industry requires less energy ( non renewable) than computer sector, then after trade countries having comparative advantage in computer energy will face increased energy usage, enisdions and environment quality to deteriorate.

3. Technique effect - if opening trade improves production efficiency in a way that requires less fuel overall it will leave environment unaffected.

However exact consequences of opening trade on environment cannot be predicted from these effects alone. Greater trade and thereby greater income will lead society to demand more environmental friendly products thus creating a demand for improved environment.

Rahul Sunny answered 1 year ago

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