Critical Evaluation Essay on Principle 5: Trade Can Make Everyone Better Off

2021-05-25 09:25:11
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Introduction

The existence of diversity in the distribution of natural and human-made resource has affected the partner of economic activities depicted across the globe. The difference in factors of production, policies, and financial capacity in countries resulted in coordinated interaction to improve the level of performance within the local and global economy. According to Mankiw Gregory, a renowned economist, the ten principles of economics depict how the role of the people, government, and channels of financial interactions form the baseline of economic development and growth. Mankiws fifth principle states that trade can make everyone better off. The scholar based the argument related to this principle on the idea that trade guarantees mutual benefit through local and international integration. The principle expanded on the idea of families interacting together to acquire the goods and services they are unable to provide through diverse methods of exchange. Mankiw claimed that on a wider perspective countries trading together accumulate returns favorable for growth and development. Nevertheless, theorists have critically evaluated the notion of trade having a mutual benefit for countries engaging in joint trade. Aspects such specialization and economic integration, as well as free trade, have affected some economies because of externalities and microeconomic factors. In this paper, we evaluate the application and implications of this principle as depicted by Mankiw and other critical implementation views from a global perspective.

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Overview of Mankiws Sentiments on Principle 5

The process of trade involves the exchange of services or brands for profit generation as well as to acquire the necessary goods or service that one cannot produce or provide. Therefore, the notion of trade involves the interaction between interested parties. The trading process is subject to the volume of transaction and the partners; therefore, according to the Mankiw, trade can occur within the family circle or even globally amongst countries. The principle ascertains that trade cannot be compared to sports where the winner is the sole receiver of the gratitude and other advantages that characterize the associated win. Another party who lost is not related to the win. Therefore, Mankiw states that for a game, there is always a winner and a loser. Concerning this comparison, Mankiw claimed that trade allows each part to gain at different levels of satisfaction where each participant will always benefit, which the principle affirms as the existence of a mutual gain whenever two or more people engage in trade.

Moreover, Mankiw argued that the whenever participants of a trade process engage in an exchange of goods and services the concept of specialization develops. In this case, the provision of goods and services in any setting is subjected to a measure of quality, which will differentiate other producers in that category. Therefore, chances of traders focusing on brands or services where their expertise is excellent are high, which brings about specialization. Another factor that encourages production specialization is the effect of diversity in the distribution of factors of production. The natural resources in a country, which Mankiw related to the various capacity of each family is a social setting, also contribute to the inclination towards specialization in trade. The basis of the arguments that Mankiw linked to the fifth principle revolved around the certainty of each group accruing benefits even of smallest magnitude but never a loss. However, the economic evaluations and international trade appraisals indicate skewed benefits as well as some disadvantages for some states, which research have revealed diverse approaches towards international business implementations to ensure that the local economies and market stability are not jeopardized.

Validity of the Mankiws Fifth Principle and Mutual Benefit Perspective

The factors defining the Mankiws fifth economic principle can be evaluated across the global performance. Many countries have engaged in international trade through inter-state collaboration or regional blocks. The global analyses have depicted how such countries have advanced their level of economic development based on the short-term and long-term. Through trade, parties involved have improved their capacity regarding the per capita income, GDP, and poverty alleviation. However, the existence of countries with the same resources and ability brings about the effect of competitive advantage. Competitive advantage has enabled countries to concentrate on the production of goods and services whose opportunity cost is relatively lower than in other states across the globe (Economy Watch n.p; IMF n.p). According to Mankiw, the benefit of trade is a two-way affair where each state focuses on the power of human ingenuity as well as the implication of rationality. Each state capitalizes on the increasing level of consumption in the other country, which brings importation and export relationship. The sustainability of trade relationship is subject to the constant of the existence of demand and a corresponding demand.

Moreover, through international trade, countries such as China, the United States, and Russia have improved their capacity to produce large volumes of industrial goods. The difference in imports and exports, as well as the large external market, has developed the level of growth and development. The standard of technology has enhanced by the changing tastes and preferences of consumers. Customers in a country in Africa can access products from the United States while those in the United States are users of African-based brands and services. The disparities in regional development have been solved through trade interactions, which have opened more avenues for entrepreneurial culture. The level of competition across trade partners has improved the quality. Mankiw among others has affirmed how trade assists in transforming the surplus raw materials into usefulness for economic growth and development. According to the theory of comparative advantage, specialization enhances the effective use of resources of production such as the raw materials and human labor to reduce the magnitude of opportunity cost. Such moves have improved the ability of economies such as the United States and China to grow to high levels through corporate interaction with Brazil and Africa respectively.

Furthermore, the International Monetary Fund report in 2011 showed the correlation between international trade among countries and successful growth and development. According to the report, IMF expounded the positive implication of trade for mutual benefit, which advanced the global economy across all sectors. The facts described in the reports depicted the sentiments of Mankiw. IMF pointed out that through trade, most developing countries such as China, Russia, South Africa, and Kenya have advanced their economic capacity with some of the states moving to emerging markets category within a short time. Approaches such as the Uruguay Round that ended in 1994 contributed to the steady 6% increase in the worlds market value across the global, regional blocks (IMF n.p). Moreover, the IMF recommended the need for further trade liberalization since the countries engaging in trade are bound to enjoy the mutual benefit. The perception that any country engaging in trade will not suffer as stated in the fifth Mankiws Principle is a motivating factor to increase in trade liberalization economic zones. The World Trade Organization reports have indicated the changes across states within the integrated economic regions where trade collaborations have improved the growth and development performance indicators. Nevertheless, the distribution pattern related to the success from trade is not uniform.

Alternative Perspectives of the Fifth Principle

The fifth economic principle that Mankiw proposed in line with the decision-making process in the corporate world has been subjected to alternative critical evaluation and some theories have been established to explain the difference. The first contention emanates from the implication of trade on income distribution among partners. Scholars have introduced the mobility factor about specialization and its effect on the skewed income distribution. Ricardian approach to trade ascertains that the only free factor of production is labor, which cannot be associated with auxiliary costs as compared to other factors. Therefore, the Ricardian Model shows that the countries as well as the people of that state gain from trade activities. However, some conditions must be considered for the counties engaging in international trade to experience such a scenario (Yu 315). Factors such as trade externalities have created an adverse effect on some countries irrespective of the rate of GDP. Mankiws principle does not consider the implication of engaging in business activities. The advanced arguments in Ricardian Approach predict the gain for each party in trade but leave room for a possible loss on a long-term basis such as the cost emanating from the immobility of the other factors of production.

Moreover, economists have raised concern regarding the principle based on the difference existing among industries. Each industry is subjected to unique combination proportion in line with the factors of production as outlined in the Proportion Theory. Trade between capital-intensive and labor-intensive states will lead to one country losing on long-term basis depending on the level of comparative advantage and specialization. Cases of one product having an escalated demand for trade are common. In the light of the existing evidence from the IMF and WTO, some states in Sub-Saharan Africa and Asian regions have suffered an economic recession because of engaging in trade with capital-based economies (IMF n.p; WTO n.p). International trade based on the emphasis that is given to capital-based production has affected the labor market in the United States. On the other hand, the technical production process such as the manufacture of computers in Brazil has been downgraded because of the US production implication. Moreover, the African countries have specialized in agricultural output and partly mining because of the comparative advantage of the developed economies in machinery and chemical production. According to the Heckscher-Ohlin model, factor endowment calls for evaluation of the competitive advantage for each nation to enhance the trade gain described in Mankiws Principle (Gokcekus and Bengyak n.p).

Furthermore, Stolper-Samuelson Theorem came up with an approach, which assists economists to identify the winners and looser in trade engagement. The two scholars found out that trading with another party raises the capacity of the country in line with the abundant factors of production but has a significant effect on the scarce factor. While evaluating the validity of a win and a loss in trade Stolper and Samuelson described the implication of a capital-based trade state, which the theorem ascertains that improves their capital price and demand but affect their labor market and supply. Besides, the existence of specialization and resource endowment restricts the county to capital-intensive production. Such cases do not depict uniform growth and development. Therefore, according to the theory, it is not easy to strike an equal distribution of growth and income when engaging in trade without a strategy to control the negative implications. The method clearly depicts a capital-oriented country will always gain while the labor-based economies will lose their ability to grow at a reasonable economic rate. Such a possibility explains why countries have undertaken various...

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