Macro Essay Example | Topics and Well Written Essays - 500 words - 2

Macro - Essay Example Normally the PPF does not shift inward. Theoretically PPF can shift inward if there is a decline in the factor endowment or a decline in technology or both. But in reality it is possible in the abnormal situations such as disaster or war when the endowment declines. The above statement can be explained by using an example. We consider a country having two sector agriculture and industry. Here we consider that the maximum of the industries are small scale and cottage industries. If the country engages itself in free trade then it would certainly be an exporter of agricultural product. The producers of agricultural product would enjoy better price in the global market. On the other hand the foreign industries are more cost efficient so they can supply industrial products at a lower price. The consumers of the domestic economy would be benefitted and the income of the country would also rise. But the small scale and the cottage industries would face foreign competition. That would hamper the interest of the owners of such industries. Hence the economy would face welfare gain while the owners of industry would be worse off. Absolute Advantage: Let us consider that in country i the amount of labor required to produce 1 unit of j is given as Lij. For all i=A,B and j=X,Y. Now if we find LAX LBY we can say that country A enjoys absolute advantage in production of X and B in Y. If the countries are subject to perfect competition, full employment and perfect mobility of factors within the domestic boundary A should specialize completely in production of X and Bin Y. Free trade would be mutually beneficial. Comparative Advantage: Theory of comparative advantage emerged to answer the question â€Å"If one of the two countries enjoys absolute advantage over the other in both lies of production should there be any chance of mutually