It is common to read statements to the effect that domestic inflation or production cost increases hinder our ability to export and also stimulate imports. Is this consistent with the Classical view of international trade? What effects would such an event have on the overall economy according to Classical thinking?

Question

Quizplus · Accepted Answer

The Answer is The statement that domestic inflation or production cost increases hinder our ability to export and stimulate imports is not consistent with the Classical view of international trade. According to Classical economics, a country's ability to export is determined by its comparative advantage in producing goods and services, not by domestic inflation or production costs. In fact, Classical economists believe that a country can benefit from importing goods and services that it cannot produce as efficiently, while focusing on exporting goods and services in which it has a comparative advantage.

In the Classical view, if domestic inflation or production cost increases were to occur, it would lead to a decrease in the country's competitiveness in the global market. This could result in a decrease in exports and an increase in imports, as foreign goods and services become relatively cheaper compared to domestically produced ones. This could lead to a trade deficit and a decrease in the overall economic well-being of the country, as it would be less able to benefit from international trade.

Overall, according to Classical thinking, domestic inflation or production cost increases would have a negative impact on the overall economy, leading to a decrease in exports, an increase in imports, and a potential trade deficit. This is in contrast to the idea that such events hinder our ability to export and stimulate imports, as suggested in the statement.

It Is Common to Read Statements to the Effect That