ECO-212 Principles of Economics - Robert Coates
University Of Phoenix
Faithlyn Wright, Trina Drinka, David Barrett,
Amber Kemper, Josue Garcia
July 11, 2010.
Advantage and Limitation of International Trade
International Trade is important to many countries because it allows a country to import products or resources that may be difficult to produce locally. As a result, this enhances the country’s growth and economic wealth, and also allows the country to focus on increasing the production of resources or goods that the country can then export elsewhere. For example, in the simulation, Rodamia produces both corn and cheese, but they have a comparative advantage in producing cheese. As a result, they can decrease the number of corn they produce while increasing the production of cheese. Rodamia can then import corn from a country that specializes in corn but has a high demand for one of Rodamia’s products. When a country specializes in a particular product this is known as comparative advantage. Comparative advantage in producing cheese will result in a much more favorable balance of trade for Rodamia. Although international trade provides many advantages, there are some disadvantages as well. One limitation of International Trade may occur if a country decides to sell exported products cheaper than it does to its local residents, the process known as dumping. Romadia was left with two alternatives, whether to impose tariffs, or set a quota on its import products. This will create an adverse effect because there will be a shortage and increases in the prices of the products. Price increases will lower the demand for the products. Consequently, this hinders the progress of the company’s growth.
Key Points Emphasized in Simulation
In the simulation one of the factors that they were affected by and choose to look international was the supply and demand of the items, and the cost factors that came across with those items- corn, cheese, watches, and DVD players. It was cheap to receive the items and have them imported in then to have them made locally. The balance of trade was also discussed in the simulation because it was the difference between the value of the goods from Uthania and Alfazia exports and the value of the goods to Rodamia imports. One way of measuring comparative advantage is the concept of opportunity cost. There are differences in comparative advantage among countries because each county has a different mix of natural resources and factors of production, like land, labor, capital, and entrepreneurship. If a company exports a product at a price lower than the price it normally charges on its own home market, it is said to be “dumping” the product. Is this unfair competition? Opinions differ, but many governments take action against dumping in order to defend their domestic industries. Calculating the extent of dumping on a product is not enough. Anti-dumping measures can only be applied if the dumping is hurting the industry in the importing country. Absolute and Comparative Advantage
A country has absolute advantage in the production of a good compared to another country if it can produce the product at a lower cost or with higher productivity. Absolute advantage is a relative term and calculated through comparisons with other economic units. Absolute advantage compares industry productivities across countries. The theory of absolute advantage, credited to David Ricardo, and to some degree John Stuart Mill. Adam Smith’s concepts of international trade let to the development of theories of absolute and comparative advantage (Economypedia, March 18, 2009). A country has a comparative advantage in the production of a product if it can produce that product at a lower opportunity cost compared to another country (Int’l Trade Theory and Policy, July 18, 2006). To determine the potential welfare from trade and...