Comparative Advantage, ISI, and the Impact of Culture on Economies
Comparative Advantage and Global Welfare
World output increases when countries specialize in producing goods and services where they have a comparative advantage, as defined by economist David Ricardo.
Countries should allocate their resources to produce goods and services for which they have a comparative cost advantage. This leads to more efficient production, where one partner makes products cheaper, better, and faster than its trading partner.
In conclusion, trade based on comparative advantage improves the welfare of a country and the world because each country focuses on industries where they have the highest success, experience, and the lowest opportunity cost.
Import Substitution Industrialization (ISI)
Import Substitution Industrialization (ISI) is a development economics policy that emerged in Latin American countries following World War II. It advocates replacing foreign imports with domestic production to reduce foreign dependency.
Raul Prebisch, an Argentinian, developed the ISI theory, believing that commodity prices would continually fall, which proved to be incorrect.
In Latin America, ISI led governments to maintain high exchange rates for their currencies, as they needed to import machinery. However, ISI was ultimately inefficient because these industries were not exposed to international competition.
The Influence of Culture and Religion on Economies
Culture significantly impacts economies. For example, if a society views economists as corrupt, fewer people will pursue economics, negatively affecting the country’s economic development. Conversely, if the profession is respected, more individuals will become economists, benefiting the economy.
Max Weber’s study in Germany demonstrated that religion affects the economy. He found that the average income varied among Jews, Protestants, and Catholics, with Jews having the highest income, followed by Protestants, and then Catholics. Additionally, larger Catholic families tend to have higher incomes, while family size does not affect income for Protestants.