Countries whose economies are based on the production of only a few
goods face risks from fluctuations in world prices. For this reason,
protection to promote diversification may be viewed as desirable.
Tom Uhlman / Alamy Stock Photo
Promoting Diversification
For a very small country, specializing in the production of only a few
products—though dictated by comparative advantage—might involve risks
that the country does not want to take. One such risk is that technological
advances may render its basic product obsolete. Another risk, especially
for countries specialized in producing a small range of agricultural
products, is that swings in world prices lead to large swings in national
income. By using protectionist policies, the government can encourage
the creation of some domestic industries that may otherwise not exist.
The cost is the loss of national income associated with devoting resources
to production in industries in which there is no domestic comparative