Economics and International Trade
Introduction
From the information gained from reading the simulation Rodamia should export corn and other agricultural products to its three neighbors and especially Santice and import DVD players from Santice and Uthania
International trade is the exchange of goods and services between countries (Audley, 1998). Trade improves consumer choice and total welfare and different countries have different factor endowments such as climate, skilled labor force, and natural resources vary between nations (Audley, 1998). Hence some countries are better placed in the production of certain goods and services than others.
Economic theory predicts all countries gain if they specialize and trade the goods in which they have a comparative advantage. This is true even if one nation has an absolute advantage over another country (Arizpe et al, 1999).
Advantages of international trade
From the simulation I can see that International trade enhances increased specialization so that higher output allows economies of scale. Further, a larger market allows domestic producers greater scope for economies of scale.
The simulation also reveals that, International competition stimulates competition. This in essence can lead to domestic firms striving to become global hence adapting modern technology, product and process innovations that reduce unit costs. Absolute advantage occurs when a country or region can create more of a product with the same factor inputs (Audley, 1998).
I can also infer that comparative advantage exists when a country has lower opportunity cost in the production of a good or service.Comparative advantage is based on differing opportunity costs reflecting the different factor endowments of the countries involved (Arizpe et al, 1999). The theory assumes free trade, willingness to specialize and factor mobility. Specialization and trade benefits countries providing at an exchange rate between the respective opportunity cost ratios (Arizpe et al, 1999). Countries benefit if they specialize in the production of a good or service in which they have a comparative advantage that is a lower internal opportunity cost (Arizpe et al, 1999).
Limitations of international trade
International trade can lead countries become dependent on imports of essentials from other countries. In this situation a conflict in one country can halt production in another
Foreign producers may engage in dumping that is selling output below average cost as part of a predatory pricing or contribution pricing strategy. A country may experience the disadvantage of overspecialization, including diseconomies of scale (Audley, 1998).
International trade can lead to vulnerability to sudden changes in demand (Audley, 1998). All products have a life cycle. Where a country has specialized in a product consumers no longer want, structural unemployment follows (Audley, 1998).
Four key points from the reading assignments that were emphasized in this simulation
- A country should export what it can produce more efficiently for it to benefit in international trade.
- International trade brings in specialization of which in return bring about high production and quality products to consumers.
- Comparative advantage exists when a country has lower opportunity cost in the production of a good or service
- International trade encourages competition which as result benefits the consumers by allowing for quality products at a fair price.
Application of what learned from the simulation to the workplace
In workplace I can advice those responsible for international trade to encourage the export of products and services which the country is more efficient in product in order to take the benefits of comparative advantage
The Concept Summary results
International trade allows increased specialization so that higher output allows economies of scale.
International competition stimulates competition.
Comparative advantage exists when a country has lower opportunity cost in the production of a good or service.
Comparative advantage is based on differing opportunity costs reflecting the different factor endowments of the countries involve.
References
Arizpe, Lourdes, Guiomar Alonso Culture, (1999) Globalization and International Trade. Background Papers Vol. I Human Development Report.
Audley, P. (1998) Culture or Commerce; Canadian Culture after Free Trade. Stoddart Pub.