Dynamic comparative advantage theory
Options:
a. helps explain why some nations use industrial policy to support potentially competitive new firms b. cannot explain strategic competition between firms such as Boeing and Airbus c. is another name for Ricardo’s comparative advantage theory |
The Correct Answer Is:
a. helps explain why some nations use industrial policy to support potentially competitive new firms
Correct Answer Explanation: a. helps explain why some nations use industrial policy to support potentially competitive new firms
Dynamic comparative advantage theory is an extension of the traditional concept of comparative advantage, which was originally proposed by David Ricardo in the early 19th century.
While Ricardo’s theory focused on static advantages that arise from differences in resource endowments, technology, and factor costs, dynamic comparative advantage theory takes into account the dynamic nature of international competition, innovation, and technological progress.
Option (a) correctly states that dynamic comparative advantage theory helps explain why some nations use industrial policy to support potentially competitive new firms.
This is because dynamic comparative advantage theory recognizes that in a rapidly changing global economy, a nation’s comparative advantage can evolve over time. This evolution is driven by factors such as technological progress, innovation, and changes in relative costs.
In this context, industrial policy refers to government interventions and strategies aimed at promoting specific industries or firms within a nation’s economy.
By providing targeted support, governments can help nurture and develop new industries or firms that have the potential to become internationally competitive in the future.
This aligns with the principles of dynamic comparative advantage theory, which acknowledges that nations can actively shape and enhance their comparative advantage through strategic policies.
Now, let’s analyze why the other options are not correct:
b. cannot explain strategic competition between firms such as Boeing and Airbus
This statement is not accurate. Dynamic comparative advantage theory is well-equipped to explain strategic competition between firms like Boeing and Airbus.
The theory recognizes that firms within a nation can develop competitive advantages based on factors such as innovation, research and development, economies of scale, and access to skilled labor.
These advantages can change over time, and firms engage in strategic competition to gain or maintain their competitive edge. Therefore, dynamic comparative advantage theory is relevant in explaining the competition between firms like Boeing and Airbus.
c. is another name for Ricardo’s comparative advantage theory
This statement is incorrect. While dynamic comparative advantage theory builds upon Ricardo’s original concept of comparative advantage, it is not synonymous with it. Ricardo’s theory primarily focuses on static advantages derived from existing differences in factor endowments and production technologies.
In contrast, dynamic comparative advantage theory takes into account the dynamic nature of international competition and the role of innovation and technological progress in shaping a nation’s comparative advantage.
Therefore, it is a more advanced and refined version of the original concept, rather than simply being another name for it.
In summary, dynamic comparative advantage theory is a crucial framework for understanding how nations can actively shape their comparative advantage over time through policies like industrial support for potentially competitive new firms.
It recognizes that in a rapidly changing global economy, a nation’s competitive position can evolve, and strategic interventions can play a vital role in this process. While it builds upon Ricardo’s original concept, it represents a more sophisticated understanding of international economic dynamics.
In essence, dynamic comparative advantage theory emphasizes the importance of proactive policies and adaptability in harnessing evolving global economic trends to enhance a nation’s competitive position.
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