INTERNATIONAL TRADE, COMPARATIVE ADVANTAGE AND PROTECTIONISM
1. According to the table above determine which country has the absolute advantage
in corn and which in soybeans. In addition, determine which country has the comparative
advantage in corn and which in soybeans. Make sure to support your answer by deriving the
opportunity costs of each.
Ans. A producer with absolute advantage over the other in the production of a good or service is if it can produce that product using fewer resources. Therefore; Canada has absolute advantage in Corn and Mexico in Soybean.
Comparative advantage is the producer with the lowest opportunity cost. Opportunity cost is the cost of an alternative that must be forgone in order to pursue a certain action or the benefits you could have received by taking an alternative action.
For example, the opportunity cost of going to college is the money you would have earned if you worked instead. On the one hand, you lose four years of salary while getting your degree; on the other hand, you hope to earn more during your career, thanks to your education, to offset the lost wages.
Canada O/C for corn 8/2 = 4 soybeans
Canada O/C for Soybean8/2 = 0.25 Corns
Mexico O/C for corn2/10 = 0.2 Soybeans
Mexico O/C for Soybean10/2 = 5 Corns
Canada has comparative advantage in soybean and Mexico has comparative advantage in corn.
2. According to the table above, would there be trade flows in both directions if the exchange rate were $1 = 1 peso?
Ans. The USA would gain by exporting plastic and importing pesos from Mexico. At an exchange rate of 1:1, it now only has to give up $1 worth of plastic to obtain 1 pesos, whereas before trade it had to give up $4 for 8 pesos. On the other hand the USA would not benefit from trade on paper because at the inception USA was getting a good rate on paper at $1 to 3 pesos.
3. If a lower exchange rate spurs exports then why wouldn’t it be a good idea of policymakers to intervene to push the exchange rate as low as they can?
Ans. It is not a good idea for policy makers to intervene to push the exchange rate as low as they can because importers sometimes would not benefit or get value for their money. The exchange rate would also affect the quantity of goods received.
4. What is protection as it refers to international trade?
Ans. Protectionism is restraining trade between countries through methods such as tariffs through imported goods, restrictive quotas, and a variety of other government regulations designed to allow fair competition between imports and goods and services produced domestically.
5. Explain the law of comparative advantage and why it is important in international trade? Ans. The concept of comparative advantage is an integral part in achieving increased gains in international trade. The concept, first introduced by David Ricardo in 1817 states comparative advantage exist when a country has a “margin of superiority” in the production of a good or service, where the marginal cost of production is lower. He explained how trade can benefit all parties such as individuals, companies, and countries involved, as long as goods are produced with different relative costs. The net benefits from such activity are called gains from trade. This is one of the most important concepts in international trade. According to the principles, benefits of trade are dependent on the opportunity cost of production. Opportunity cost is measured in terms of what you give up of another other. A country with no absolute advantage in any product, i.e. the country is not the most competent producer for any goods, can still be benefited from focusing on export of goods for which it has the least opportunity cost of production. When countries specialize and trade based on comparative advantage consumers pay less and consume more and resources are used more...