World Economy Essay

Topics: International trade, International economics, Free trade Pages: 16 (5704 words) Published: December 11, 2011
Free Trade
Free trade may also be called International Trade.
Free Trade occurs when goods and services are traded between countries without the use of import controls. For most of the late twentieth century, the prevailing wisdom has been that free trade can lead to improvements in economic welfare in the global economy. However this has not prevented regular trade disputes between countries - often when one country feels that unfair trade practices have caused the benefits from trade to become distorted. Free trade is very important to all developed countries as there are likely to be economies of scale - when producing for larger markets (foreign markets), average costs of production will be lower. There is likely to be a wider choice of products for consumers to buy and prices are likely to be lower because of lower costs. There is likely to be more efficient use of resources because countries will specialise in producing goods and services where opportunity cost is lowest, i.e. countries will produce goods and services that they can make more efficiently. There is likely to be an increased global output of goods and services without using more inputs. Another reason for importance is there is likely to be a higher standard of living for consumers. There may be political benefits because dealing with other countries will improve relationships.

Maquiladoras (Mexican factories which take in imported raw materials and produce goods for export) have become the landmark of trade in Mexico. These are plants that moved to this region from the United States, hence the debate over the loss of American jobs. Hufbauer's (2005) book shows that income in the maquiladora sector has increased 15.5% since the implementation of NAFTA in 1994. Other sectors now benefit from the free trade agreement, and the share of exports from non-border states has increased in the last five years while the share of exports from maquiladora-border states has decreased. This phenomenon has allowed for the rapid growth of non-border metropolitan areas, such as Toluca, León and Puebla. All three are larger in population than Tijuana, Ciudad Juárez, and Reynosa. The main non-maquiladora industry that has benefited from NAFTA is the automobile industry.

Absolute advantage
A country is said to have an absolute advantage over another country in the production of a good or service if it can produce that good or service using fewer real resources. Equivalently, using the same inputs, the country can produce more output. The concept of absolute advantage can also be applied to other economic entities, such as regions, cities, or firms, but we will focus attention on countries, specifically in relation to their production decisions and international trade flows. The fallacy of equating absolute advantages with cost advantages is a never-ending source of confusion. Deviations between the two are caused by the fact that real resources may receive different remunerations in different countries.

We can illustrate absolute advantage on a simple example:
* Country A can produce 1000 parts per hour with 200 workers. * Country B can produce 2500 parts per hour with 200 workers. * Country C can produce 10000 parts per hour with 200 workers. Considering that labour and material costs are all equivalent, Country C has the absolute advantage over both Country B and Country A because it can produce the most parts per hour at the same cost as other nations. Country B has an absolute advantage over Country A because it can produce more parts per hour with the same number of employees. Country A has no absolute advantage because it can't produce more goods than either Country B or Country C given the same input. The law of comparative advantage refers to the ability of a country to produce a particular good or service at a lower opportunity cost than another party. It is the ability to produce a product with the highest relative efficiency given all the...
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