Peter Pundit, an economics reporter, states that the European Union (EU) is increasing its productivity very rapidly in all industries. He claims that this productivity advance is so rapid that output from the \(\mathrm{EU}\) in these industries will soon exceed that of the United States and, as a result, the United States will no longer benefit from trade with the EU. a. Do you think Peter Pundit is correct or not? If not, what do you think is the source of his mistake? b. If the \(\mathrm{EU}\) and the United States continue to trade, what do you think will characterize the goods that the EU sells to the United States and the goods that the United States sells to the EU?

Short Answer

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A) Peter Pundit's mistake in his claim is that he focuses only on productivity and the absolute advantage of the European Union industries, overlooking the importance of comparative advantage and opportunity cost. Even if the EU has an absolute advantage in all industries, trade between the United States and the EU will still be beneficial as long as there is a comparative advantage. B) The characteristics of goods traded between the United States and the European Union will be determined by their respective comparative advantages. Each party is likely to specialize in producing and exporting goods in which they have lower opportunity costs, leading to mutual benefits and efficient use of resources.

Step by step solution

01

Understand the Concept of Comparative Advantage

It is crucial to understand the concept of comparative advantage, which is a key principle in international trade. Comparative advantage refers to the ability of a country or region, such as the European Union, to produce a good or service at a lower opportunity cost compared to another country or region. Opportunity cost refers to the cost of foregoing the next best alternative when making a decision. In the context of international trade, the comparative advantage helps countries decide which goods and services it should specialize in producing and trading with other countries.
02

Recognize the Flaw in Peter Pundit's Claim

The claim that rapidly increasing productivity in all EU industries will lead to the United States no longer benefiting from trade is based on the assumption that the EU will have an absolute advantage in all goods, which means they can produce goods more efficiently. However, having an absolute advantage in all goods does not necessarily mean that the United States would not benefit from trade. In fact, trade between countries is primarily driven by their comparative advantage, not their absolute advantage.
03

Explain the Comparative Advantage and Opportunity Cost Dynamic

By focusing only on productivity and output of industries, Peter Pundit is overlooking the fact that even if the EU has higher productivity in all industries, the United States might still have a comparative advantage in some industries due to lower opportunity costs. For instance, the United States might have a lower opportunity cost for producing certain goods due to its resource endowments, technological expertise, or infrastructure.
04

Answer to Question A: Peter Pundit's Mistake

As explained above, Peter Pundit's mistake is disregarding the importance of comparative advantage and opportunity cost in international trade. Even if the EU has an absolute advantage in all industries, international trade will still be beneficial to the United States as long as there remains a comparative advantage between the two trading partners.
05

Answer to Question B: Characteristics of Goods Traded Between the EU and the United States

Based on the concept of comparative advantage, the goods that the EU will sell to the United States are likely to be those in which they have a comparative advantage due to lower opportunity costs. Similarly, the goods that the United States will sell to the EU will likely be those in which the United States has a comparative advantage. In conclusion, Peter Pundit's claim is not accurate because it overlooks the importance of comparative advantage, which is the key driver of international trade. Trade between the EU and the United States will continue to be beneficial to both parties as long as there is a comparative advantage that allows for specialization and exchange of goods.

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