Question

describe interaction principles. from the 10 principles of economy describe 5,6 and 7 and give an example

Answer 1

Three interaction principles, which are also the 5th, 6th and 7th principle out of 10 principles of economics are-

(1) Trade can make everyone better off:- Trade can make everyone better off because it allows countries to specialize in what they do best and to enjoy a wider variety of goods and services. It means that when economies decide to invest its resources in the production of commodity which it can produce more efficiently, i,e when economies decide to specialise in the production of commodity whose production it can carry more efficiently, it can lead to an increase in the total production of all the commodites and increase the consumption possibilities of all the economies. For e.g, suppose two economies, A and B, with only two commodities X and Y to consume.Suppose A has comparative advantage in producing good X and B has comparative advantage in producing Good Y, then if A nd B specialises in the production of Xand Y and trade the surplus product with eac other, it would lead to an increased production of both Goods Xand Y with efficient use of resources. Both countries can consume more of both the goods after trade. Thus trade made both better off.

(2) Markets are usually a good way to organize economic activity:-Most essential work that market does is that it helps to meet the buyer of a product to the seller of that product. Had there been no market, it would have been very tough for a person, who needs some product, to search the seller of that product. Thus, Markets usually play a key role in organising economic activity.

(3) Governments can sometimes improve market outcomes:- Government can influence market outcomes through its various policy implementations. Fo e.g Government can increase the supply in the economy by increasing the private investments through interst rate lowering and expansionary monetary policies. It can increase the demand in the economy by lowering the taxes of the citizens. Government can also adopt some redistributive policies for efficient allocation of resources.