Question

Suppose that germany decides to become self-sufficient in bananas and even to export them. in order to accomplish this, large tax incentives are granted to companies that will invest in banana production. soon, the german industry is competitive and able to sell bananas at the lowest price anywhere. does germany have a comparative advantage? why, or why not? what are the consequences for the overall economy?

Answer 1

Germany does not have a comparative advantage, which is the ability to do something better or more efficiently that someone else. Even though they are producing bananas, the industry is artificially supported by the tax incentives and not because Germany is an amazing banana-growing location.

The consequences for the economy are lost opportunity costs that could be producing things where they do have a comparative advantage (cars, for example). Another consequence is that the tax money could be better spent on other things.