Question

It is argued that import substitution is a misguided trade policy if the intent is to promote long-term economic growth. Explain the reasons underlying this argument and discuss this assertion using the following framework: Y↑ = C + I + G + (EXPORTS - ↓IMPORTS)

Please don't copy and paste from other websites. I can get those myself. Only answer if you have knowledge of the topic so we're not getting random answers that don't make sense.

Answer 1

Firstly let us know what is import substitution ( IS ) . It is a policy which advocates the replacement of foreign imports with domestic production . So by this policy import reduces and domestic production rises . This is shown by the equation : Y↑ = C + I + G + (EXPORTS - ↓IMPORTS) .

But if we dig deep we will find that it is a misguided trade policy . It does not promote long-term economic growth . We need to remember that trade heppens on the basis of comparative advantage . If imports are restricted then we lose gains from trade due to comparative advantage . This is an international loss . Also the domestic industries may not be efficient enough due to lack of foreign competition . So Imports (I) falls but Income or GDP (Y) , may not rise as much . So overall GDP declines . Thus in a way the economy shrinks in long run .