Question

The U.S. produces corn in abundance whereas Japan faces a shortage of corn. a. If the U.S. starts to export corn in large quantities to Japan, what do you predict will be the effect on the price of corn in Japan? b. Will the U.S. eventually run out of corn? c. Do you think the Hotelling Principle applies to America's corn? Why or why not?

Short answer

a) The price of corn in Japan will decrease. b) No, the U.S. will not run out of corn. c) No, the Hotelling Principle does not apply to America's corn as corn is a renewable resource.

Step-by-step solution

Analyzing the Effect on Corn Price in Japan

When the U.S. starts exporting corn in large quantities to Japan, the supply of corn in Japan will increase. According to the law of supply and demand, an increase in supply, assuming demand remains constant, will typically lead to a decrease in the price of corn in Japan.

Determining if the U.S. will Run Out of Corn

Consider that the U.S. has a comparative advantage in corn production due to factors such as land, climate, and technology. While there may be concerns about increased exports leading to reduced domestic supply, it is unlikely that the U.S will run out of corn. Instead, American farmers may increase production to meet both domestic and export demands.

Understanding the Hotelling Principle

The Hotelling Principle states that non-renewable resource prices should increase at the rate of interest over time due to scarcity. Corn, however, is a renewable resource, not a non-renewable one, because it can be replanted and harvested annually. Therefore, the Hotelling Principle is not directly applicable to America's corn. Corn prices are more likely influenced by factors such as weather conditions, technological improvements, and changes in global demand rather than the principle of non-renewable resource scarcity.

Key concepts

law of supply and demand

The law of supply and demand is a fundamental economic principle that defines the relationship between the availability of a product and the desire for that product. When the supply of a product increases and the demand remains steady, the price of the product tends to fall.
For example, in the scenario where the U.S. exports large quantities of corn to Japan, Japan's corn supply increases. As per the law of supply and demand, this increased supply should cause the price of corn in Japan to drop. Conversely, if the demand for corn in Japan suddenly increased without a corresponding rise in supply, prices would rise. This balance of supply and demand helps economically regulate pricing and availability in markets.

comparative advantage

Comparative advantage refers to the ability of a country or entity to produce a particular good or service at a lower opportunity cost compared to others. This concept is key in international trade, explaining why countries engage in trade by specializing in the production of goods or services they can produce most efficiently.
In the case of the U.S. and corn production, the U.S. has a comparative advantage in producing corn due to factors like its abundant land, suitable climate, and advanced agricultural technology. This allows the U.S. to produce corn more efficiently and at a lower cost than Japan, which has limited arable land for corn cultivation. By exporting corn to Japan, the U.S. leverages its comparative advantage, benefiting both countries by optimizing resource use and maximizing output.

renewable vs non-renewable resources

Understanding the difference between renewable and non-renewable resources is crucial in the context of resource management and economic planning.
Renewable resources are those that can be replenished naturally over short periods. Examples include solar energy, wind, and biomass like corn. Because corn can be replanted and harvested annually, it is considered a renewable resource. The continuity of corn supply depends on effective agricultural practices and favorable environmental conditions.
Non-renewable resources, such as fossil fuels like coal, oil, and natural gas, are finite and cannot be recreated within a human lifespan. The Hotelling Principle applies to these resources, suggesting that their prices should theoretically rise over time due to increasing scarcity.
In our example, since corn is renewable, it doesn't fall under the Hotelling Principle. Instead, corn prices are more influenced by factors such as technological advances in farming, climatic conditions, and market demand fluctuations.