Author Question: Classical and Neoclassical trade theory makes the case that free trade can bring a country to an ... (Read 458 times)

LaDunn · **on:** Jun 30, 2018

Classical and Neoclassical trade theory makes the case that free trade can bring a country to an optimum and economically efficient use of its resources; and hence is an optimal trade-policy, if the objective is maximizing long term economic growth.

There are those who argue that the experience of the Asian Miracle countries, such as Taiwan, South Korea and Singapore verify this argument in the real world. Explain. There are others who argue that the experience of these countries cannot be used to verify or support the argument above. Explain.

Question 2

If the forward rate is greater than the spot rate, what are markets signaling about their expectations for the future spot rates for the home currency?

What will be an ideal response?

dpost18 · **Reply #1 on:** Jun 30, 2018

Answer to Question 1

Both arguments may indeed be made. These countries did in fact tend to promote exports in a consistent set of policies. However, they tended to do this via conscious National industrial-policy (e.g., South Korea using the Japanese system), and hence (with the possible exception of Hong Kong) do not provide a good test-tube for the long run effects of a free-trade stance.

Answer to Question 2

The home currency is expected to depreciate over the maturity period of the forward contact.