Question

a) Does foreign trade harm or foster domestic growth?

b) Why is allocative efficiency typically achieved through a market economy

Answer 1

Answer a.

Foreign trade fosters domestic growth. As the consumers can consume beyond the production possibility of the country.

Consumers can import goods for which they dont have the resources or technology to produce domestically.

Producers can produce and specialize in the production of the good in which they have comparative advantage.

Due to trade, the resources are used optimally.

International cooperation increases, exchange of ideas, technology and culture takes place.

All these factors help the country achieve economic growth.

Answer b. In market equilibrium, consumers are willing to pay equal to marginal utility and producers are Willing to receive equal to marginal cost. Allocative efficiency is achieved through market equilibrium because at that level marginal cost is equal to marginal utility.