Microeconomics Question Help Please?

Question

Here is the question:

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

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

B) If the EU and the United States continue to trade, what do you think will charactize the goods that the EU exports to the United States and the goods that the United States exports to the EU?

Answer 1

A) So, I assume that what he is argument is, is that the EU will no longer see the need to buy any thing from the US, and as a result, the US will not trade with the EU, and therefore will not benefit from trade. Is that about it?

Ok, the problem with that line of reasoning is that it assumes that people in the EU (whom I shall call "EUers") do not have the desire for anything other than what is currently being produced. If Peter is correct, and the EU is able to produce EVERYTHING that the EUers currently buy, he has forgotten about those things that the EUers want that are not currently produced. There is always some marginal good that people will want, and when there is any sort of increase in production, this good is the next to be produced.

Another important thing to consider is the idea of comparative advantage. It sounds as though, in this scenario,  the EU is able to do everything better than the US. However, there are going to be some things that the EU does WAY better than the US and some things that the EU only does a little better than the US. The EU firms will naturally begin to do those things at whcih they are WAY better. In this way, they will increase productivity in this area even more. On the flip side, the US will begin to do those things in which the EU firms had a smaller advantage. These are the things in which the US has a comparative advantage. As a result, they will begin to get better and better at those things.

So, the US will still benefit from trade, just in different industries. Also important is the fact that many people will lose their jobs in the US to the EU. This sounds really bad, but remember there will be more jobs in America doing things that were not able to be done before. These workers must re-learn a trade.

B) I guess my last answer gives as good of an answer to this as I can,  a priori.