Question

Suppose a capital abundant country, such as Italy, enters into free trade with a natural resource rich country, such as India. (i) Explain the form of trade, such as, who exports what and imports what, using the concept of comparative advantage in trade theory. Identify each country’s comparative advantage and disadvantage. (ii) Does trade create winners and losers within each country? Explain how.

Answer 1

India and Italy will trade in goods in which they are abundant in. Thus, Italy being capital abundant, will have a competitive advantage in capital intensive goods and hence,  will export capital abundant goods to India like heavy machinary, cars etc. while India having abundance of natural resources will have a competitive advantage in semi-finished goods and raw materials and hence, export raw material or semi-finished goods to Italy such as steel which is used in manufacturing of other machinary and hence, count as semi finished good, precious stones are something that can be exported by India etc.

Yes, trade will create losers and winners in both the countries. In Italy, the losers will be owners of resources who provide raw materials to companies because they have to face competition from Indian raw material which is cheaper as India has competitive advantage in this. In India, the losers will be owners if capital as they have to compete with capital intensive goods from Italy which are more efficient as Italy is having competitive advantage in the same.

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