Essay Hw 2 2014

Kimberly Hogan
MGD 140
HW 2
Chapter 4
November 14, 2014
1. Adam Smith suggests that markets turn self-interest into the common good. What are the conditions necessary for that to happen, and do these conditions exist in the country you are doing your project on?

Adam Smith, a classical economist, wrote the “Wealth of Nations” in 1776 that documents industrial development in Europe. Smith is a champion of laissez-fair economics, which minimizes the role of government taxation and intervention in the free market. This “allowing to do” approach includes a hands-off approach, not interfering with the workings of the free market, by government. Adam Smith holds that the “invisible hand” will guide supply and demand, in which each person that looks out for their own self-interest actually helps create the best outcome for all. These conditions do not exist in Cambodia.
“The predominance of agriculture and the lack--or neglect--of real industrial development have characterized Cambodia's modern economy since independence in 1953…the government has made few attempts to industrialize the nation.
After Cambodia became independent in 1953, the country's economic policies were shaped by the succession of governments that followed. Prince Sihanouk opted for unconditional aid from the East and from the West, and the nation made modest strides. The Lon Nol government would have adhered to a laissez-faire doctrine, but it was overwhelmed by the war around it. The Khmer Rouge adopted a fanatical and doctrinaire self-reliance, and the Cambodian people and nation were ravaged by it. The post-1979 government of the People's Republic of Kampuchea (PRK), with its Vietnamese mentors, acquiesced to a pragmatic combination of socialism and small-scale capitalism, and the country achieved some limited rehabilitative goals. In the late 1980s, government policies fundamentally relied upon the nation's own sparse resources--chiefly agriculture, a nascent industrial base, and modest foreign aid from Comecon countries and nongovernmental international organizations.”1

2. What might be some of the long-term effects for Portugal and England if they follow Ricardo’s comparative advantage model? What might be the comparative advantages for your country?
Ricardo’s comparative advantage model theory suggests that combined output by two countries will be increased in comparison to two countries acting in self-sufficiency producing both goods. If an unrestricted exchange between countries exists, the countries taking part would increase the total world output if each country were to specialize in specific goods. In the case represented in Cypher (page 118), “if England specializes in the production of cloth, the good for which it has comparative advantage, and Portugal specializes in wine production, the good in which it has comparative advantage, then world output can be increased above what it was when each country did not specialize. If the two countries now trade with one another for the good they do not produce, both countries can be better off.”

Portugal and England would then BOTH see an economic advantage for years to come and both could reach a higher level of industrialization and economic progress. After trade between the countries, the world market price of wine and cloth will fall between the opportunity costs of both countries. By Portugal specializing in wine production and trading for cloth made in England, Portugal would save ten labor hours. Then Portugal could take this money and invest it in making wine more efficiently and become more competitive with other countries. In the end, this would drive down the price of wine and consumers in all free-trading countries would benefit. However, complete specialization in either wine OR cloth may create structural unemployment, as some workers cannot transfer from one sector to another. Unfortunately, the comparative advantage model is not a static concept. Over time, costs of

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