Question

a) What is the effect on spending in the economy caused by changing the interest rate?

b) How are international trade and comparative advantage linked?

Answer 1

A. Interest rate determines the cost of investments , spending and borrowing. With the alterations in interest rates, the govt changes or varies the decisions of the people in Economy, and these changes are part of monetary policy. A rise in rate if interest attracts more saving while falling rate of interest attracts more spending. This is because with rise in interest rate , the cost of spending rises. This rise in cost is because with rising rate of interest , the returns from saving is higher. Hence to defer the decision to spending , the cost rise . If the rate of interest falls, spending is less costly because returns from saving are anyways low, hence it is preferred to make an investment and spend in the Economy. This is how changing rate of interests navigate spending.

2. International trade is opening up of trade market with the world where production patterns are heterogeneous. Due to differences in development level, availability of resources , local cultures etc , the production of some goods is relatively low cost as compared to other countries. These advantages are also called capitalistic advantages , which are generally derived of natural advantages in a country.  

Comparative advantages are also navigated through these differences. EG. one nation might be producing low cost labours and other low cost capital goods. This kind of heterogeneity allows international trade to be profitable , as with availability of both , nation can make goods they have comparative advantage in . This increases the total production and lowers the total cost. Thus comparative advantages and international trade are linked.