Answer to Question #277807 in Macroeconomics for Bushkid

Question

Country A and B are two main trading partners. A sells mainly raw materials to B, while B sells mainly consumption goods to A. There was a major technological breakthrough in the extraction technology which drastically reduced the cost of production in country A 

Describe the initial set-up between the two economies       (5 mks)

Analyse the effects of thee change on the two economies       (5 mks)

Answer 1

Country A and B are two main trading partners. A sells mainly raw materials to B, while B sells mainly consumption goods to A. There was a major technological breakthrough in the extraction technology which drastically reduced the cost of production in country A

i) The initial set-up between the two economies is export and import relationship where country A sell raw material to country B and country B sells final goods to country A , as we consider it as the factor of product in theory of comparative advantage , also known as the Heckscher-Ohlin theory which basically hold that the country will export those commodities which are produced by factor that it has relative abundance and it will import the products whose production required the factors of production where it has relatively less abundance

When country A transfer technology it may be done through foreign direct investment to encourage the inflow for the low income countries.

ii) Effects of these change on the two economies

On the basis of these conditions, both the nations would better off as as under country A would export the raw material and import the final good from B

As Country A sell the raw material to country B it will increases the income of country A

It would maximize the efficiency of country due to their technological advancements, resultant as increase in total production which they import to country A, increases the income of country B

Technological breakthrough also reduces the cost of production which reduces the prices of the product in country A

Improve the quality of the products due to technological advancement