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Which Statement Describes the Economic Impact of This Trade Agreement

In this world, the classic Ricardian business model provided a good explanation of business models, e.B which countries would produce which products. England would produce textiles according to its wool production and availability of capital, and Portugal would produce wine according to its sunshine and fertile soil. If Portugal chose to erect barriers to the import of British textiles, its own economy would be less prosperous and it would still be in Britain`s interest to allow the free import of Portuguese wine. In addition to trade diversion and trade creation, which are essentially static effects, participants in free trade areas and customs unions are also striving for dynamic advantages, such as.B. an expansion of production, as firms take advantage of the growing size of the market to increase production, and increased efficiency as firms adapt to increasing competition. Access to a larger market is particularly important for small countries whose economies are too small to justify large-scale production. NAFTA has boosted Mexican agricultural exports to the United States, which have tripled since the pact`s implementation. Hundreds of thousands of jobs in the auto industry have also been created in the country, and most studies have found [PDF] that the agreement has boosted productivity and lowered consumer prices in Mexico. In 1979, economist Paul Krugman noted that much of the trade took place between developed countries that had similar factors of production. For example, the United States and the nations of Europe have broadly similar factors of production, but generally conduct a huge amount of trade within the same industries. Thus, the United States will export automobiles and auto parts to Europe while importing cars and auto parts from Europe. The compact has catalyzed Mexico`s transition from one of the world`s most protectionist economies to one of the most trade-friendly.

Mexico had eliminated many of its trade barriers when it acceded to the General Agreement on Tariffs and Trade (GATT), the forerunner of the WTO, in 1986, but still had an average tariff level of 10% before NAFTA. In addition, some products do not use the same factors of production throughout their life cycle. [6] For example, when computers were first introduced, they were incredibly capital-intensive and required a highly skilled workforce. Over time, as the volume increased, costs decreased and computers could be mass-produced. Initially, the United States had a comparative advantage in production; but today, as computers are mass-produced by a relatively low-skilled workforce, comparative advantage has shifted to countries where cheap labor is plentiful. And other products can still use different factors of production in different countries. For example, cotton production in the United States is highly mechanized, but in Africa it is very labor-intensive. The fact that factors of production can change does not negate the theory of comparative advantage; it simply means that the range of products a nation can produce relatively more efficiently than its trading partners can change.

Another important assumption of traditional economic theory is that basic factors of production such as land, labor, and capital are not exchanged across borders. Although Ohlin considered that these basic factors of production were not traded, he argued that the relative yields of factors of production between countries tend to be balanced because goods are traded between countries. Subsequently, Samuelson argued that factor prices would in fact be balanced under free trade conditions, and this is called in economics the factor price equalization theorem. [7] This could mean, for example, that international trade would lead to a fall in the wage rates of unskilled workers in the high-wage country relative to the rents available from capital and to the same level as wages in the low-wage country, and that wages relative to the rents available from capital in the low-wage country would increase and correspond to the level of the country. in which labour was less abundant. (The implications of this are important and will be explored in more detail in Chapter 8.) Given the problems with business models, some economists reject their usefulness. For example, Bhagwati says, “I look at a lot of estimates of trade expansion and trade profits that are generated with a lot of effort by processing the numbers in institutions like the World Bank using huge computable models. . . . like little more than high-altitude flights in invented flying machines. [17] Many economists would consider this criticism extreme, but nevertheless, business models should be viewed with a high degree of caution.

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