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Frontier Issues in Ecological Economics

Frontier Issues in Ecological Economics

Philip Lawn

Ecological economics formally emerged in the late 1980s in response to the failure of mainstream economic paradigms to deal adequately with the interdependence of social, economic and ecological systems. Frontier Issues in Ecological Economics focuses on a range of cutting-edge issues in the field of ecological economics and outlines plausible measures to achieve a more sustainable, just, and efficient world for all.

Chapter 16: Increasing Sustainable National Income by Restoring Comparative Advantage as the Principle Governing International Trade

Philip Lawn

Subjects: development studies, development economics, economics and finance, development economics, environment, ecological economics


INTRODUCTION In the previous chapter, three important claims being made by ecological economists were outlined. The first was that, in a world characterised by highly mobile capital flows, international trade is governed by the principle of absolute advantage, not by the principle of comparative advantage. The second was that international trade can undermine the efforts of national governments to introduce more stringent environmental and social standards because, when capital flows are highly mobile, transnational corporations can readily relocate production activities to avoid nationally instituted non-price rules and cost internalisation policies. Finally, it was claimed that the potential for capital to flow to locations enjoying an absolute advantage in production can lead to the emergence of large trade imbalances that cannot be serviced in an ecologically sustainable manner. To deal with these claims – in particular, the need to restore comparative advantage as the principle governing international trade – an IMPEX system of foreign exchange management was posited. The aim of this chapter is to provide theoretical support for the IMPEX system. To do this, the IS-LM-EE model revealed in Chapter 13 is expanded to include a ‘balance of payments’ or BP curve. The more extensive IS-LMEE-BP model is employed to analyse the relationship between international trade and sustainable national income under a different set of international trading conditions – one where capital is highly mobile (the status quo position); another where the international mobility of capital is restricted by the IMPEX system of foreign exchange management (the Lawn position).1 314...

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