Chapter 16: Increasing Sustainable National Income by Restoring Comparative Advantage as the Principle Governing International Trade
16. Increasing sustainable national income by restoring comparative advantage as the principle governing international trade 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...
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