Economics is the study of reconciliations between unlimited wants and limited resources. Those reconciliatory attempts extend across geographic boundaries. A central issue in international trade is whether gains accrue to citizens in the global market place due to their exchanges. Theoretically, larger quantities and wider choices of goods are available with international trade than without it. Exchanges include both goods and currencies because of the interactions among firms, households, and governments located around the globe. In this essay, students will learn economic concepts and philosophical differences that allow them to examine policies affecting the prices and the quantities of items traveling between nations. We will focus some initial attention on the production possibilities model, the opportunity cost concept, and the foreign exchange market. Afterwards, readers will gain a better understanding about the processes and content of payments between trading partners. Those exchanges take into account how much of one currency is worth in terms of another currency, which is something that continues to captivate the attention of many peoples. Readers will find that international trade is a rather odd concoction of free trade practices and trade restrictions. Across time and space, international leaders and their countries come together in an attempt to lessen trade restrictions in some instances and increase them in other instances. The essay closes by providing readers some insight into various arguments and rationales for trade restrictions.
Keywords Absolute Advantage; Ceteris Paribus; Comparative Advantage; Exchange Rate; Export; Free Trade; Import; Law of Demand; Law of Supply; Macroeconomics; Market; Microeconomics; Net Exports; Normative Economics; Opportunity Cost; Positive Economics; Production Possibilities Model; Quantity Demanded; Quantity Supplied; Quota; Tariff; Trade Restriction Rationale
Economics: International Trade Economics
Readers may come to understand economics as a study of reconciliations between unlimited wants and limited resources. Reconciliation is an attempt to find some optimal middle ground in problem solving. The economic problem arises due to resource scarcity and it prompts decision makers to make rational choices from amongst all the alternative solutions. Each and every choice involves a sacrifice because it is very difficult, if not impossible, to avoid tradeoffs.
International trade is an interesting topic and lends itself to being one of the most controversial topics in economics. Getting to the conceptual foundations for international trade, the main purpose of this essay is to inform undergraduate students about the economic context in which exchanges of physical quantities of products and currencies occur between countries. To some extent, the author assumes readers are familiar with principles of economics. Nonetheless, the information found in this essay appeals to those unfamiliar with economics, but engages all readers in pondering and attempting to answer some important initial questions.
Where do you stand regarding the issue of international trade? Do you favor protecting domestic jobs? If so, what cost attachments are there to job preservation measures? To what extent are you willing to make sacrifices in terms of accepting fewer choices in the market place and paying higher prices for them? Where does product quality and safety fit into all this? Perhaps recent news reports about recalls of foreign-made products diminishes the concern about higher prices. One could reasonably argue that consumers realize that high quality is available at a high price though some major retailers of imported goods claim quality is available at a low price.
Basic Economic Concepts
At issue is whether benefits or gains accrue through international trade. Economists tend to believe that international trade does indeed provide benefits to consumers, producers, and workers. However, their views fall short of being universally acceptable due, in part, to the various dimensions of any international trade issue. Free trade may be an ideology given the existence of constraints such as trade barriers, international politics, and isolationist strategies. All those issues and concerns provide a rich backdrop against which to learn the major tenets of international trade theory as the reader may find in an introductory economics course.
International trade theory fits well with a basic understanding of how a country progresses through various stages of an economic maturation process. As countries move from an economy primarily based on hunting and gathering through manufacturing, services, and information heading toward and beyond a knowledge-based economy, a larger portion of domestic production becomes available for exchange with a trading partner. Opportunities arise to trade that excess production for other goods, which are the excess production of another country. In accordance with theory, specialization in production creates those opportunities (Razmi & Refaei, 2013).
For varied reasons some countries are better at producing specific items than are other countries. As a case in point, the US is better at growing wheat and Columbia is better at growing coffee beans. In essence, each country will specialize in producing those goods best suited to their resource bases. Specialization arises from the discovery and acknowledgement that one country in the absolute sense is better suited at producing more of one specific item than is another country. Absolute advantage by definition is the ability of one country to produce more of something than another country. However, maximizing the gains from trade is reliant upon a country's ability to produce more than another, doing so in a most efficient manner.
The gains from trade are observable when a country's citizenry attains a combination of goods that consists of larger amounts of each good than would be possible in the absence of trade. Comparative advantage by definition is specializing in that product for which the country's sacrifice in terms of other goods is minimal. The value of the foregone alternative is, by definition, an opportunity cost. In essence, finding solutions to the economic problem of scarcity involves minimizing opportunity costs. In brief, the gains from trade accrue through specialization, which in turn, reflects a country's recognition of what it can and should produce at a lower opportunity cost than another country.
Opportunity costs sometimes take the form of sacrifices that are linear in their relationship, which translate into the correspondence of a benefit with some given or constant amount of cost. However, economists tend to view the equation as one involving increasing amounts of cost in the form of a curvilinear relationship. The illustration of the opportunity cost concept is most effective when one attempts to consider all the possible choice combinations whether the opportunity costs are increasing as in the case of a curved-line concave-shaped arrangement or they are constant as in the case of a straight-line downward-sloping arrangement. A study of international trade introduces students to both forms within a larger model of production, specialization, and exchange often in the context that the world contains only two countries. Furthermore, students and other readers should think of a model as a tool that simplifies reality and remain cognizant of the fact that a key component in any economics model is the ceteris paribus assumption, which in translation from Latin into English means all else held constant.
Under this and some other assumptions, Country A will eventually purchase products from Country B and vice versa by virtue of their being trading partners within the population of countries around the globe. At any given moment, for the sake of simplicity if for no other reason, there is an immediate need to hold constant the state of technology, the availability of resources, and the level of productivity. This constraint limits production possibilities to an initial set of specific combinations. With a view toward a nation's current ability to produce two items, say goods X and Y, there is some precise point at which a specific combination of X and Y is possible in equal amounts, but any attempt to produce more of one essentially translates into the production of less of the other. In brief, the opportunity cost associated with producing one unit of X is the sacrifice of one unit of Y. This situation illustrates the opportunity cost concept while holding all else constant.
Economics, in general, involves applying the opportunity cost concept to decisions made at the margin. In other words, how a change in one variable results in a change in another variable. As an introduction to the orientation of economics toward marginal analysis, the production possibilities frontier is a model that portrays all those combinations that a country's entire economy can produce. It is a macroeconomic concept, which effectively conveys the interdependencies among scarcity, choices, and tradeoffs. The difference between those economic divisions resides in their scope. Macroeconomics is a study of economics using models of the whole economy whereas microeconomics is a study of the behaviors of consumers and producers as they interact through price mechanisms in models we can refer to as a market....
Free International Trade
A1. (a) Free International trade is referred as a mechanism where goods and services can be traded freely among different countries and economies without artificial restrictions being created by the government. It's a way of diversifying the markets with different goods and services available in different parts of the world.
Following are the Advantages according to Ken Edge of free international trade-
1. Increased production
Free trade allows a specific country to enhance the production of those commodities in which they have a comparative advantage.
By enhancing the production of a certain commodity the country can take advantage of the efficiencies generated from economies of scale and increased output.
International trade leads to an increase in the size of the firm, leading to lesser production costs and ultimately heading to increased production.
2. Attracting Investment
FIT helps in attracting investment, as investment follows trade, more firms would like to set up their own manufacturing units to reduce their costs.
For example: FIT helped many MNCs to open their own manufacturing units in India to cater to a wider population by reducing costs (Cadbury, Nestle, Mercedes-Benz) etc.
3. Benefits to consumers
Consumers gain as they are being offered a wide range of variety of products and services in the market.
For example: Many imported drinks are now available in our country like Coke, Sprite, etc.
4. Foreign exchange boosts in the economy
It majorly helps in boosting the Foreign-Exchange Reserves in an economy as there is a trade between 2 or more countries which help in maintaining a stable foreign exchange reserve.
For example: Trade with USA helps in maintaining a stable Dollar Reserves in India.When India exports overseas it receives currency from the country that has bought the goods. This money is then used in return to buy things from USA.
5. Economic growth
With the introduction of free trade in a country there is a holistic development in the country as there is an increase in the jobs, production efficiency increases rapidly, consumers are happy as their needs are satisfied. The competitive industries increase the level of efficiency and productivity of the country.
Trade liberalization creates a lot of winners and losers in the economies. Employment is expected to increase in the export industry and workers will be relocated as import competing industries fold (close) in the competitive environment. With free trade many jobs in countries are created. There is a boost in employment opportunities as there will be high demand for their exports.
For example: Free Trade helps in job creation in China as the labour is cheaper. Hence, the costs of the products are also cheaper leading to high demands in Europe.
Following are the Disadvantages according to Ken Edge of free international trade-
1. Domestic Instability
Free trade can be the reason for many subsidies by the government, as these subsidies are given by the government to domestic firms so that they can compete with the International goods. Further, might as well lead to deportation of jobs from 1 country to another. This means that businesses and jobs of the domestic countries are more vulnerable to downturns in the economies of the trading partners,
2. Political issues
Free trade is subjected to trade of oil, gold and the factors leading to determination of these prices are sometimes not in favor of the trading nations, as they are controlled by big corporate companies, deteriorating benefits through free trade.
3. Environmental Issues
With the trend of free trade, there is a pressure of delivering goods at a particular time, maintaining some standards of quality, leading to polluting air, water. Hence, due to this firms shift to countries where there is less regulation of environmental issues.
4. Social Welfare Issues
The firm needs to maintain minimum wages, safety standards, which increase the cost of production, causing to injury and death due to lack of safety measures used to reduce costs.
5. Difficult for Infant Industries
Free Trade makes it difficult for infant industries to match the standards of quality of imported goods, as these infant industries cannot afford the technology possessed by their foreign competitors, hence leading to a clean sweep of market share by imported goods.
For example: Indian cosmetic brands like Jovees is not widely used as compared to its foreign counterpart Mac and Krylon as their quality standards are way better.
6. Issues related to Cultural Identity
Through FIT, products of different countries are available in the market, but unfortunately these products do not cater to the cultural teachings of the host country, they export cultural ideas of their home countries.
For example: Mc Donald's initially using Beef Oil in its burgers in India.
A1. (b) 'Nash equilibrium is a solution concept of a non-cooperative game involving two or more players where no player gains by changing their own strategy. If a player selects a strategy and no player can benefit by changing strategies while the other players keep theirs unchanged, then the current set of strategy choices and the corresponding payoffs constitute a nash equilibrium.' - Wikipedia
Free Trade Policy Imposing Restrictions
Country B Free Trade Policy 60,60 20,70
1. If Country A decides to choose Free-Trade Policy (A-60), then the best option for Country B is to choose Imposing Restrictions (B-70).
2. If Country A decides to choose Imposing Restrictions (A-70), then the best option for Country B is to choose Imposing Restrictions (B-30).
3. If Country B decides to choose Free-Trade Policy (B-60), then the best option for Country A is to choose Imposing Restrictions (A-70).
4. If Country B decides to choose Imposing Restrictions (B-70), then the best option for Country A is to choose Imposing Restrictions (A-30).
5. Now If Country A decides to choose Imposing Restrictions (A-30), then the best option for Country B is to choose Imposing Restrictions (B-30) as there is no gain to adopt Free Trade Policy. Hence, this is called Nash Equilibrium.
Free Trade Policy Imposing Restrictions
Country B Free Trade Policy 60,60 70,80
Imposing Restrictions 70,70 80,60
1. If Country A decides to choose Free-Trade Policy (A-60), then the best option for Country B is to choose Imposing Restrictions (B-70).
2. If Country A decides to choose Imposing Restrictions (A-80), then the best option for Country B is to choose Imposing Restrictions (B-70).
3. If Country B decides to choose Free-Trade Policy (B-60), then the best option for Country A is to choose Imposing Restrictions (A-80).
4. If Country B decides to choose Imposing Restrictions (B-80), then the best option for Country A is to choose Free-Trade Policy (A-70).
5. If country A choses to imposes restrictions, then B will also choose to impose restrictions (i.e. it will remain at 70) as there is a better pay off by Imposing Restrictions. Hence, this is called Nash Equilibrium.
A2. (A) (i) Monetarist
' Being a monetarist, it is accepted that the economy achieves the balance point or equilibrium on its own because of the forces of demand and supply in the economy. The businesses work well when left to themselves.
' The money supply of an economy needs to be controlled and for this monetary policies must be utilized as financial approach prompts a moderate development of the economy and it is additionally troublesome to deal with the economy adequately.
' Also, mediation from government ought to be as insignificant as could be expected under the circumstances as it regularly destabilizes things and fiscal policy may prompt moderate development of the economy which is bad.
' As a Keynesian economist, I accept that the economy can't be left to itself. Mediation of government and utilization of fiscal policies is vital for a business sector to recuperate from subsidence. Government ought to build using and give subsidies and lessen charges which will impact the level of aggregate demand.
' Also, dissimilar to monetarist view I feel that the common level of unemployment is not perfect. I likewise accept that under fiscal policy, value and wages are "sticky". It is troublesome for specialists to acknowledge any pay cuts. Additionally, a few specialists may be a piece of unions and the organization may not have any desire to uncover itself and henceforth, the organizations don't chop down the wages. Sticky costs imply that the organizations don't let the costs fall. Consequently, equilibrium in the economy is looked after.
(iii) Supply-side economy
As an economist, I surmise that if the accompanying measures are taken, the economy will recuperate at a quick pace.
' Government ought to have more extensive investment in instruction. It ought to urge colleges to take understudies from denied regions and teach them. This will help in extending the aptitude base of the workforce. With better abilities, more profitable capital might be utilized and this will help in diminishing the unemployment level and consequently, it will help in decreasing the recession in the economy.
' Business assessment ought to be brought down so that the organizations can contribute more cash for improvement and this will head to development in the economy.
' The government ought to actualize arrangements which will help in expanding speculations from abroad. Politicians must comprehend the essentials of venture from abroad as it is a method for creating new request and additionally helps in making more openings for work.
' The govt. must make changes in the welfare framework as it will help in enhancing work incentives. Case: It could help in enhancing the reasonableness of kid forethought.
A2. (b) Fixed Exchange Rate: - Under this framework, the rate of exchange is formally announced and is altered, here little variety from the fixed value is conceivable under some particular conditions. The purpose behind an fixed exchange rate framework is to keep up a nation's currency value inside an extremely limited band.
Monetary Policy:- Monetary policy is that arrangement under which the central bank or money related power of the nation controls money supply in the country which pushes the development of the economy and guarantees steadiness.
Right away, when the central bank of a nation builds the interest rates, then foreigners might want to put resources into that nation as they might win more in light of the high exchange scale being advertised.
For instance, if individual X has one million pounds to contribute, then he might search for the interest rates being offered in banks in a few nations. On the off chance that India offers him a interest rate of say 10 for every percent and different nations offer him 5 for every percent then he might want to put into India as here, he can twofold his interest.
For contributing more, the foreigners may demand the currency of that nation. Since the interest equality does not hold, financial capital will stream into the economy. This prompts expand demand of the currency of that nation. Yet, supply is insufficient to take care of the demand. Subsequently, the central bank will need to print more cash notes to take care of the demand for the money. Increase in money supply prompts fall in the equilibrium price of money (and this is the interest rate). The economy is once more to the equilibrium level and the introductory increment made by the central bank in the premium rate prompts diminish in the interest rate in the wake of arriving at the equilibrium level. This shows that monetary policy under the fixed exchange rate is ineffective.
(Begg, D., Ward, D., Page 369-370)
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