Peter Pundit an economics reporter, states that the European Union (EU) is incre

Question

Peter Pundit an economics reporter, states that the European Union (EU) is increasing its productivity very rapidly in all industries. He claims that this productivity advances is so rapid that output from the EU in these industries will soon exceed that of the United States and, as a result, the United States will no longer benefit from trade with EU.

Do you think Peter Pundit is correct or not? If not, what do you think is the source of his mistake.

If the EU and the United States continue to trade what do you think will characterize the goods that the EU exports to the United States exports to the EU

Explanation / Answer

The answer depends on who in the United States you are looking at, but in general I would say that Peter Pundit is wrong. One of the results of the Gravity Model is that the bigger the economy is, the more your country will trade with them. There will be an increase in the supply of goods and services so the prices will fall. This will make American consumers happy because they can buy more - in other words American consumers benefit. American industry will now face increased competition which will hurt their bottom line. However, since the EU is trading more, they will also have more money to spend (possibly on American goods - if so then it could help American industry). Also, using comparative advantage the US will make the things they are efficient at making, and Europe will do likewise then trade resulting in more goods for everyone. (yay!) The US government will also have more revenue through tariffs - American government benefits. Peter Pundit doesn't take into account that the trade of our goods to the EU will also increase (result from the Gravity Model), that through specialization the EU and the US can both have more goods through trade then they could if they just produced their own things (comparative advantage), and increased revenues for the government through tariffs. As for what they will trade, this also goes to comparative advantage. We will trade the things that we can make more efficiently than Europe, and they will likewise trade the things that they can make more efficiently. I hope this helps, please rate if it does.

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