Saturday, December 26, 2009

How would a country in isolation or autarky promote economic growth?

International trade is a source of economic growth, but it is not the only source of economic growth. Anything that allows the production of more output from a given amount of inputs fuels economic growth. For example, technological innovation and improvements in capital -- both physical and human -- are sources of economic growth.How would a country in isolation or autarky promote economic growth?
The most obvious answer would be to open its borders to trade and investment with other countries.





Because the country is in isolation, some products will be trading domestically at prices much higher than elsewhere in the world. Those are products were other countries have a comparative advantage. Those products will be imported at lower prices, resulting in more relative income for the country.





Similarly, some products will be trading domestically at much lower prices than elsewhere in the world. Those are products that the domestic country has a comparative advantage in producing, and those products will become exported goods, earning more income for firms than while in isolation.How would a country in isolation or autarky promote economic growth?
In order to promote economic growth, I suggest to this country to open its borders (promoting the free movement of capital and production factors) and to increase the savings rate.


It should try to specialize in accordance with the amount of its endowments and to its technological possibilities (in order to exploit increasing returns to scale).

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