Applying International Trade Concepts Paper
April 4, 2010
Applying International Trade Concepts Paper
In the University of Phoenix simulation, Applying International Trade Concepts, a situation is presented concerning international trade – ???the theory of comparative advantage, the impact of tariffs, quotas, and dumping, and the rationale behind free trade agreements (FTA)??? (University of Phoenix, 2010, p. 19). Throughout the simulation scenarios are presented and choices must be made to determine ???what products to produce within the country and what products to import based on the Production Possibility Frontier (PPF) (University of Phoenix, 2003, para. 1) as well as when to impose trade restrictions like tariffs and quotas, and when to negotiate trade agreements.
Advantages and Limitations
One of the advantages of international trade is imported products that are produced more efficiently in other countries will give consumers more choice in terms of price and quality. Another advantage is increased demand leads to an increase in production, achievement of economies of scale, and therefore, more competitive production. As domestic producers expand their markets to other countries, the initial country gets new avenues for investment, which leads to more employment in the country where investment is taking place, and better returns on capital for the investing county.
International trade has limitations as well. Trade barriers for countries that do not participate in free trade agreements are high relative to the countries that participate in free trade agreements, even though the non-participating country may be more competitive in the production of a product.
Effects of International Trade
The effects of international trade in the United States are varied. The amount of goods that are available to the United States has increased, while the price of goods has decreased. U.S. consumers have more choices for products and can pay lower prices, which has improved the standard of living for many consumers. International trade has allowed businesses in the United States to expand into new markets. The expansions have increased competition, demand, employment in some sectors, and economies of scale, while reducing monopolistic pricing and inefficiency (InfoUSA, 2003). Although international trade may have some positive effects on the economy, negative effects also have taken place. Employment in some sectors has decreased because of closures of businesses that cannot compete with the imports.
Effects on Exchange Rates
According to Colander (2008), monetary and fiscal policies have affect exchange rates in three ways: through its effect on (a) the interest rate, (b) income, and (c) price levels and inflation.
Monetary Policy. Through expansionary monetary policy U.S. interest rates are pushed down and the financial inflow into the United States decreases, the demand for dollars decreases, the value of the dollar is pushed down, and the U.S. exchange rate decreases. Contractionary monetary policy does the opposite.
Fiscal Policy. Through expansionary fiscal policy interest rates lead to an increase in exchange rates. Contractionary policy leads to a decrease in interest rates and a decrease in exchange rates.
Monetary Policy. Through expansionary monetary policy, when money supply increases, income expands. When income expands, imports rise; the rise in imports leads to the decrease of the U.S. exchange rate. Through contractionary monetary policy, when money supply decreases, income contracts. When income contracts, imports fall; the fall in imports leads to the increase of the U.S. exchange rate.
Fiscal Policy. In expansionary fiscal policy, government borrowing raises interest rates and attracts foreign capital. In trying to get more dollars for investment, foreigners bid up the price of the dollar, which causes the exchange rate to grow in the short-run. As the imported goods become less expensive in the United States and exports become more expensive, the merchandise trade balance will decline. In the long-run, ???the accumulation of external debt that results from persistent government deficits can lead foreigners to distrust U.S. assets and can cause a deprecation of the exchange rate??? (Weil, 2008, para. 6). Contractionary fiscal policy decreases income, which decreases imports, and increases the exchange rate.
Price Levels and Inflation
Monetary Policy. Through expansionary monetary policy U.S. price levels go up, exports become more expensive, imports become less expensive, U.S. competitiveness decreases, foreign currency demand increases, dollar demand decreases, which decreases the exchange rate. Contractionary monetary policy does the opposite.
Fiscal Policy. Expansionary fiscal policy increases price levels, decreases competitiveness, and reduces the exchange rate. Contractionary fiscal policy decreases price levels, increases competitiveness, and increases exchange rates.
Key Points of Reading Assignment
Four key points from the reading assignments that were emphasized in the simulation were comparative advantage, opportunity cost, balance of trade, and trade restrictions.
Comparative advantage is ???the ability to be better suited to the production of one good than to the production of another good??? (Colander, 2008, p. G-1). Comparative advantage was used in the first scenario to determine which commodities would be encouraged for export, and from which countries would commodities be imported.
Opportunity costs is ???the benefit you might have gained from choosing the next-best alternative??? (Colander, 2008, p. g-8). Opportunity cost was used in the first scenario when determining which of the two commodities would be chosen for exporting and importing.
Balance of trade is ???the difference between the value of the goods and services a country imports and the value of the goods and services it exports??? (Colander, 2008, p. G). Balance of trade was used in scenario three when determining if trade restrictions should be imposed to equate the price of imported and domestically produced corn.
Trade restrictions such as tariffs and quotas were used in scenarios two and three. Tariffs are excise taxes on imported (internationally traded) goods (Colander, 2008) and a quota is a ???quantity limit placed on imports??? (Colander, 2008, p. G-10). The tariff was used as compensation for dumping by the import company in scenario two and as a protection to attain productive efficiency in scenario three.
Application of Concepts
The concepts learned from the simulation can be applied in any workplace, including in the management of home and family. Sometimes household tasks are assigned to or chosen by family members who can perform the task better than others to help the household run smooth and improve daily operations. Knowing how and why a country participates in international trade helps the consumer understand what the government is trying to achieve and how it will affect the economy and consumer. Understanding that choosing to concentrate production on certain items, while importing others, so that the country can concentrate its resources on products it can produce more efficiently will help consumers understand why the country is not producing as many products as had been previously produced. No longer seeing the ???Made in America??? labels on products is not necessarily a bad thing.
Concept Summary Results
Comparative advantage is the basis for international trade. Comparative advantage allows countries to specialize in products that can be produced at a lower opportunity cost. Producing and exporting these products to other countries while importing different products with comparative advantage from other countries is beneficial to all participants. The benefits include consumers have greater choices, producers having larger markets to explore, or a balance of trade that is favorable. Comparative advantage can be brought about from different factors, some of which are ???natural resources, availability and relative efficiency of factors of production, and the state of technology??? (University of Phoenix, 2003, para. 3). Because the factors that affect comparative advantage can change over time, so can the composition of a country??™s trade.
The simulation provided insight into international trade and the impacts of trade restrictions on the balance of trade. The basis for international trade is comparative advantage, and by using comparative advantage, a country can improve the overall welfare of its economy. Competitive advantage can also be applied to situations other than business, which can make things more efficient.
Colander, D. C. (2008). Economics (7th ed.). ? Burr Ridge, IL: Irwin/McGraw-Hill.
InfoUSA. (2003). The pros and cons of pursuing free-trade agreements. Retrieved from http://usinfo.org/enus/economy/trade/proscons.html
University of Phoenix. (2003). Applying International Trade Concepts [Computer Software]. Retrieved from University of Phoenix, Simulation, ECO/372 – Macroeconomics course website.
University of Phoenix, (2010). Course Syllabus: Week Five. Retrieved from University of Phoenix, ECO/372 – Macroeconomics course website.
Weil, D. N. (2008). Fiscal Policy. Library of economics and liberty. Retrieved from http://www.econlib.org/library/Enc/FiscalPolicy.html