It is generally claimed that state trading, or centrally controlled trading will tend to reach a lower economic welfare than would be reached by allowing market forces to determine trade flow directions and terms of trade
Illustrate a counter-example to this proposition.
In general, if we begin with any suboptimal distortion, the theory of the second best tells us that an additional "distortion" may move a country in the correct direction of a welfare improvement. For example, If a country has an overvalued exchange rate (that is, its currency is overpriced in the foreign exchange markets), it is possible that it will find itself in an autarkic equilibrium (that is, it might "overprice itself out of the international market"). In such a case it is easy to demonstrate that if the government exports the goods in which the country enjoys comparative advantage, and imports the other (bypassing market prices and mechanisms), the country's economic welfare will improve.
You might also like to view...
The term to describe one currency in terms of another is called
a. The interest rates b. The market price c. The inflation rate d. The exchange rate
If an individual or family began at age 25 paying funds into a tax-free investment account or pension earning a 7 percent real return, how much would they have to save annually in order for the funds to be worth a million dollars (measured in the purchasing power of today's dollar) when they reach age 65?
a. approximately $5,000 annually b. approximately $10,000 annually c. approximately $20,000 annually d. approximately $50,000 annually
Exhibit 4-10 Supply and demand data for apricots Bushels demandedper month Price perbushel Bushels suppliedper month 50 $5 80 55 4 75 60 3 70 65 2 65 70 1 55 Which of the following would occur if the government sets a price floor of $4 in the market shown in Exhibit 4-10?
A. There would be a shortage of apricots. B. Buyers would not purchase all of the apricots that are grown. C. Buyers would purchase more apricots than are currently being supplied. D. Farmers would reduce the number of acres allocated to the growing of apricots.
Compare and contrast the four market models in terms of the profit-maximizing output level for each, the shut-down rule for each, the probability of long-run economic profits being earned, and their social desirability.
What will be an ideal response?