Advocates of industrial policy maintain that government should

 Options:

a. pursue free trade as a policy that leads to maximum global efficiency b. grant subsidies to firms offering potential comparative advantage c. provide loans to domestic workers in exporting industries d. increase interest rates on loans made to firms in import-competing industries

The Correct Answer Is:

b. grant subsidies to firms offering potential comparative advantage

Advocates of industrial policy argue that government intervention is necessary to promote economic development and ensure the long-term competitiveness of domestic industries. Among the options provided, the correct answer is:

b. grant subsidies to firms offering potential comparative advantage.

This is because granting subsidies to firms that have the potential for comparative advantage can help them overcome initial hurdles and become globally competitive. Comparative advantage refers to a country’s ability to produce a particular good or service more efficiently or at a lower opportunity cost than other countries.

By providing subsidies to such firms, the government can support their growth and development, which in turn can lead to increased productivity, job creation, and economic prosperity.

Granting subsidies to firms with potential comparative advantage can have far-reaching benefits for a nation’s economy. By strategically allocating resources to these industries, governments can foster innovation and technological advancement.

This can lead to the development of cutting-edge products and services that not only capture domestic markets but also have the potential to dominate global markets. Additionally, subsidies can serve as a catalyst for job creation within these industries, stimulating economic growth and reducing unemployment rates.

Moreover, as these subsidized firms grow and become more competitive, they can attract foreign investment and partnerships, further bolstering the nation’s economic standing on the international stage.

In essence, providing subsidies to firms with comparative advantage is a proactive step towards nurturing a dynamic and globally competitive industrial landscape.

Now, let’s examine why the other options are not correct:

a. pursue free trade as a policy that leads to maximum global efficiency:

While free trade is generally considered beneficial for overall global efficiency and economic growth, it may not be sufficient on its own to ensure the competitiveness of domestic industries.

Without strategic interventions, some industries may struggle to compete in the global market due to various factors such as high initial costs, lack of infrastructure, or technological gaps. Therefore, relying solely on free trade may not address the specific challenges faced by certain industries.

c. provide loans to domestic workers in exporting industries:

While providing loans to domestic workers in exporting industries may help them finance their activities, it may not be the most effective way to promote overall industrial competitiveness. The challenge lies in the fact that providing loans to workers may not directly address the structural and systemic issues that industries face.

It may not lead to the necessary improvements in technology, infrastructure, or production processes that are crucial for long-term competitiveness.

d. increase interest rates on loans made to firms in import-competing industries:

Increasing interest rates on loans to import-competing industries can have adverse effects. It can lead to higher borrowing costs for these firms, potentially hindering their ability to invest in necessary upgrades and innovation. This could further erode their competitiveness in the global market.

Additionally, it may not be the most targeted or effective way to address the specific challenges faced by import-competing industries.

In summary, granting subsidies to firms with potential comparative advantage aligns with the idea of industrial policy, as it provides targeted support to industries that have the potential to excel in the global market.

This approach addresses the specific needs and challenges faced by these industries, leading to increased competitiveness and overall economic development.

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