Business Finance

Topics: International trade, Economics, Financial crisis Pages: 7 (2355 words) Published: February 7, 2013
S. Wright
Mr. Cambronero

“International Trade and the Effects of the current Financial Crisis” What is International Trade? According to Reem Heakal,
“International trade is the exchange of goods and services between countries. This type of trade gives rise to a world economy, in which prices, or supply and demand, affect and are affected by global events”. For example, Political change in Asia could result in an increase in the cost of labor, thereby increasing the manufacturing costs for an American sneaker company based in Malaysia, which would then result in an increase in the price that you have to pay to buy the tennis shoes at your local mall. A decrease in the cost of labor, on the other hand, would result in you having to pay less for your new shoes. Trading globally gives consumers and countries the opportunity to be exposed to goods and services not available in their own countries. Almost every kind of product can be found on the international market: food, clothes, spare parts, oil, jewelry, wine, stocks, currencies and water. Services are also traded: tourism, banking, consulting and transportation.

However, in reference to “Econometrica” Vol. 70, No. 5 (Sep., 2002), pp. 1741-1779 by Jonathan Eaton and Samuel Kortum, Published by: The Econometric Society, “the theories of International Trade have not yet come to grips with a number of facts: (1) trade diminishes dramatically with distance; (2) prices vary across locations, with greater differences between places farther apart; (3) factor rewards are far from equal across countries; (4) countries’ relative productivities vary substantially across industries”. The first pair of facts indicates that geography plays an intricate role in economic activity. The second pair suggests that countries are working with different technologies. With such findings, disadvantages and advantages are evident.

International trade allows countries to exchange goods and services with the use of money as a medium of exchange. Several advantages can be identified with reference to international trade. However international trade does have its limitations as well. Its advantages include: (1) A greater variety of goods available for consumption. International Trade brings in different varieties of a particular product from different destinations. This gives consumers a wider array of choices which will not only improve their quality of life but as a whole it will help the country grow. (2) Efficient allocation and better utilization of resources since countries tend to produce goods in which they have a comparative advantage. When countries produce through comparative advantage, wasteful duplication of resources is prevented. It helps save the environment from harmful gases being leaked into the atmosphere and also provides countries with a better marketing power. (3) Promotes efficiency in production as countries will try to adopt better methods of production to keep costs down in order to remain competitive. Countries that can produce a product at the lowest possible cost will be able to gain a larger share in the market. Therefore an incentive to produce efficiently arises. This will help standards of the product to increase and consumers will have a good quality product to consume. (4) More employment could be generated as the market for the countries’ goods widens through trade. International trade helps generate more employment through the establishment of newer industries to cater to the demands of various countries. This will help countries bring down their unemployment rates. On the other hand, there are also disadvantages of trading internationally. In reference to “Journal of International Business Studies” by Benjamin M. Oviatt and Patricia Phillips McDougall Its disadvantages include:

(1)Instead of economies of scale there might be diseconomies of scale and the curve might look like concave instead of convex. The term “diseconomies of scale” is an...
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