Answer to Question #186048 in Macroeconomics for Tyler

Question

Disadvantages is import substitution

Answer 1

1.Import substitution can lead to inefficient industries because the narrow size of the domestic market in many LDCs does not allow them to take advantage of economies of scale.

2. After the simpler manufactured imports are replaced by domestic production, IS becomes more and more difficult and costly (in terms of higher protection and inefficiency) as more capital-intensive and technologically advanced imports have to be replaced by domestic production.

3.The countries that pursue IS strategies tend not to apply high tariffs to capital goods. As such, imported capital goods are used extensively in domestic production.

4.IS policies tend to limit the development of industries that supply inputs to protected industries, which produce consumer goods.