March 12, 2010
The Simulation on International trade concepts is a study of the country of Rodamia and the decisions the leaders made regarding imports and exports for the country. While Rodamia is a fictitious country, the concepts of international trade, tariffs, quotas, and imports and exports are all applicable to the effects on the U.S. economy. This paper will discuss in detail the meaning and effect each of these concepts have on the economy.
Advantages and Limitations of International Trade
Trade is important because different countries have various quantities and types of resources, such as land, capital, labor, and businesses. Each country wants to use their resources as a source of income as much as possible. For example, a country with a great climate for agriculture would use their natural resources to grow and sell fruits, vegetables, etc. Rodamia is a large country where the largest percent of GDP comes from services. The country has roughly 4 % of its GDP in agriculture, with crops such as corn, rice, tobacco, etc. Overall, free trade is better than imposing trade restrictions; there are situations in which trade restrictions are preferred. Protecting a developing domestic industry from competition from abroad or preventing dumping are two such situations. However, as will be discussed in later sections, trade restrictions on other countries can have negative effects on the economy. Trade restrictions on imports reduces the demand for products and services from other countries.
Effects on International Trade on the U.S. Economy
According to The Trade Resource Center, “The World Trade Organization (WTO) stimulates U.S. economic growth creates good jobs and improves living standards for Americans by reducing barriers to trade, the multilateral trading system benefits American businesses, farmers and workers.” (TRC, pp 1). How does that happen? The WTO has set up rules whereby other countries will not block exports through trade restrictions and other high tariff rates. This way, goods and services flow between the U.S. and other countries that give businesses the opportunity to sell more, thereby creating greater prosperity for Americans. Additionally, the U.S. government uses the WTO agreement to “place a cap on the amount of most duties, prohibits discrimination against imports, and requires transparent and honest customs procedures. The cumulative effect of these rules is to level the playing field for America’s workers.” (TRC, pp 3)
Fiscal and Monetary policies Effects on Exchange Rate
When interest rates rise, in times of fiscal expansion, foreigners bid in an attempt to obtain U.S. dollars. This bidding causes the exchange rate to appreciate. Goods imported in to the United States become cheaper and goods exported from the U.S. to other countries become more expensive. Other countries sell more to the U.S. than they purchase, thereby having ownership of U.S. assets. However, if the buying up of American dollars by foreign countries goes on for too long, those countries will lose confidence in the American dollar.
Four Key Points
Imports are products and services one country purchases from another. For example, since Saudi Arabia has more oil than they have food, and The United States has more food than we have oil, we will have oil imported to the United States. Exports are products and services one country sells to another country for profit. For example, in the simulation, in the third year, Rodamia was rich in agriculture, namely corn. We made a decision to export corn to Alfazia and impose trade restrictions to enable Rodamia to export corn. Tariffs and Quotas are trade restrictions imposed by the government on internationally traded goods. Tariffs are the taxes imposed on imports to make them more expensive, thereby encouraging domestic consumption of the produced goods....