BENEFITS OF DIVERSITY

While it makes good economic sense to put resources into the most productive industries, no country wants to rely on only one product. Specialization in the production of one, or too few, goods makes a country more vulnerable to changes in the world economy, such as recessions, new trade laws and treaties, and new technologies. If a country relies heavily on producing a single product and demand for that product suddenly drops because another country produces a less expensive alternative, or if trade is restricted, the economy could be devastated. For example, several Middle Eastern countries rely on oil for more than 90 percent of their exports; to a large extent the economic fortunes of these countries rise and fall with the oil market.

In addition, the degree to which countries specialize is influenced by that country's terms of trade. A country's terms of trade reflect the relative prices of a country's imports and exports. In general, it is most advantageous to a country to have declining import prices compared with the prices of its exports. Exchange rates and productivity differences affect the terms of trade more than any other factors.

By developing a diverse economy, a country can make sure that even if some industries are suffering, other, more prosperous industries will keep the economy relatively healthy. Larger, more developed economies, like those of the United States, Japan, Germany and Great Britain, have many internationally competitive industries. Among many other fields, the United States is competitive in finance, entertainment, aerospace, industrial equipment, pharmaceuticals and communications.

COMPETITIVENESS

Competitiveness is a broad term used to describe the relative productivity of companies and industries. If one company can produce better products at lower prices than another, it is said to be more competitive. If, overall, the steel mills of Germany are more efficient and productive than the steel mills of France or Belgium, it would be said that the German steel industry is more competitive than the French and Belgian steel industries. Governments are always concerned about the competitiveness of their countries' different industries, since it is difficult for uncompetitive industries to survive.

In the long run, competitiveness depends on a country's natural resources, its stock of machinery and equipment, and the skill of its workers in creating goods and services that people want to buy.

Natural resources are already there and must be used efficiently, but a country's infrastructure and its workers' skills have to be built up over time. The ability of a society to use natural resources wisely, develop new technologies, improve the skills and efficiency of its workforce, and invest in its infrastructure are key factors in trying to remain competitive.

ECONOMIES OF SCALE

The Law of Comparative Advantage says that a country can become more competitive by putting its resources, through investment in training and production facilities, into its most efficient industries. Using its resources in this manner may enable a country to achieve economies of scale—increasing its output in a particular industry so that its costs per unit decrease. Lower-cost goods become more competitive in international markets.

Having access to international markets may help countries to achieve economies of scale in different industries. For example, it would not be profitable for a small country to produce expensive, sophisticated weapons systems unless it could spread the enormous research and development costs over many units. To do this, it may need to export. If nations know that they have access to foreign markets and can export, it is possible to increase the scale of their manufacturing operations far beyond what they need for their own use, and as a result the nations become more efficient and competitive.

Of course, in reality, the factors affecting a country's trade competitiveness are more complicated. Greater specialization improves competitiveness, but sometimes resources are difficult to transfer from one industry to another. An insurance agent cannot be moved to an architectural company without retraining, and it would cost a great deal of money to turn a car factory into a shoe factory.

To further complicate matters, governments often attempt to restrict or encourage international trade to achieve domestic economic goals, such as increasing employment in certain industries, developing new sources of wealth, or maintaining economic independence.

Date: 2015-12-24; view: 865