International Trade Simulation - Essay Example

?International Trade Simulation Synthesis Every country is endowed with various resources of different quantities. These resources are in the form ofland, labour, capital, and entrepreneurship. And through these resources, the country has the potential to optimize its wealth as efficient as possible. Say for example, a country that has fertile soil and a climate that is beneficial to agriculture can specialize in agricultural products. They can export the agricultural products and import products that are products more efficiently by other countries. By using this advantage, both countries will be able to increase their wealth by specializing products they products efficiently and export them, then import the ones they don’t produce so well. The Trade Representative Office of Rodamia would like to give the Hon. Michael Jacobs, President of Rodamia, some recommendations for the scenarios in the international trade we will encounter. Lisa Drake, Chairman of the Trade Commission, gave expert advice to formulate sound international trade policies and Walter Barnes, Deputy Trade Representative, assisted in handling negotiations with neighbouring countries. Rodamia has three neighbouring countries: Uthania, Alfazia, and Suntize. And each of them has their own resource of specialization. It is also of absolute importance to know the rationale of each recommendation, its advantages and disadvantages. Understanding Opportunity Costs and the Production Possibility Frontier In the first scenario, the opportunities for trade in Uthania, Alfazia and Suntize should be explored. In this case, we need to decide which products should be exported to which country and which to be imported to which country. In the agricultural sector, it is corn versus cheese, and in the electronics sector, it is DVD players versus watches. Through this, we can also determine the commodities or industries to which tax incentives could be given to encourage production and exports. According to the Trade Commission Report, international trade can be optimized by understanding the principle of absolute and comparative advantages. Rodamia has a comparative advantage on the good that it can produce at lower opportunity cost relative to another country. On the other hand, absolute advantage means having the best advantage on a particular good or service, but not necessarily relative to another country. To better understand the comparative and absolute advantages of Rodamia, the opportunity costs for each product of each country are shown in the tables below: Table 1. Opportunity cost comparison for countries producing agricultural products Corn (units: 000 tons) Cheese (units: Mn Pounds) Rodamia 1 2 Uthania 1 1 Alfazia 2 3 Table 2. Opportunity cost comparison for countries producing electronics DVD Players (units: Mn pieces) Watches (units, Mn Pieces) Rodamia 2 3 Uthania 1 2 Suntize 2 5 The opportunity cost described here is the value of what is given up. Before we set to trade, it is important to understand the Production Possibility Frontier (PPF) and the opportunity cost for each decision we take. PPF measures the maximum combination of outputs you can get from a given number of inputs, For example, the PPF of corn and cheese in Rodamia shows the maximum amounts of two goods that can be produced from the given resources and technology. In Table 1, the opportunity costs for corn and cheese were presented. If you produce no cheese, then all resources can be used to produce 4000 tons of corn. For every 1 unit of corn produced in Rodamia, 2 units of cheese are equivalent. Walter Barnes discussed Rodamia’s comparative advantage that lies in corn production since it has a lower opportunity cost compared to cheese. In the scenario of corn vs. cheese, it is highly recommended to export corn and import cheese. Now the next step is to determine which country to import cheese. We can import cheese from Uthania since the cheese production has a lower opportunity cost compared to Alfazia. Though Alfazia has an absolute advantage in producing agricultural commodities in general, these products vary in opportunity costs too. And in this case, every 2 units of corn in Alfazia mean 3 units of cheese compare to the 1:1 relation in Uthania. Table 2 presents the opportunity costs for the electronic goods available: DVD players and watches. Since Rodamia has lower opportunity cost for producing DVD players (2 units) compared to watches (3 units). So in this case it is advisable to export DVD players and import watches. Now we have to determine from which country we need to import watches. Liza Drake reported the advantage of Suntize in producing electronic goods and the immense fascination arising in Rodamia in importing watches and DVD players. Just like in the case of of Alfazia, Suntize also has an absolute advantage in its flagship commodity. However, the opportunity cost for DVD players (2 units) is lower than watches (5 units). This means that Suntize will likely export DVD players compared to watches, the item of which Rodamia is of great interest. On the other hand, Uthania produces watches with a lower opportunity cost (2 units) versus DVD players (1 unit) compared to Suntize. Uthania have a comparative advanatage to Suntize. In this situation, it is best to import watches from Uthania. Limitations The scenario depicted the Production Possibility Frontiers for only two types of goods each for the agricultural and the electronics sector. The real market competition is composed of numerous contenders. Say for the agricultural sector, corn and cheeses are not the only commodities a country can choose on which to import or export. And for the electronic goods industry, DVD players and watches are not the only items a certain market will arouse some fascination. However, this is also the benefit of what the scenario depicted. PPF is a good tool to measure the opportunity costs for two goods and the relationship between them. The political and cultural situation of Alfazia, Uthania, and Suntize were not put into detail. In import-export, the opportunity cost is just one thing to consider. More often than not, some countries export a commodity even with a higher opportunity cost for certain policies and trade regulations. The economic climate of a country should also be considered. At this point we should know the influences of foreign exchange rate and how it will affect the price of our exported or imported commodity. There are several factors that affect the exchange rate that determines a trade and investment confidence for a country. Foreign exchange rates are affected adversely by the debt accrued. Other factors are the demand for money or increase in purchasing demand, inflation, and the country’s relative growth. Conclusion It is recommended to export a commodity with lower opportunity cost and import the ones which cost higher. In importing a good, it is crucial to know the prospect country’s comparative advantage on a certain commodity aside from being familiar of their absolute advantage (like in the cases of Alfazia and Suntize). However, it should be also kept into great consideration that there are other factors that should influence the decision in trading. One factor is the foreign exchange rate. This factor determines the value of the corn and DVD players we exported to another country and the Rodanian prices of cheese and watches imported from Uthania. References Absolute vs Comparative Advantage. (2007). Infernal Rumblings. Retrieved from http://www.infernalramblings.com/articles/Economics/110/ Berko, E. (2009). Factors that Affect Foreign Exchange Rates. E-Articles. Retrieved from http://investing.e-articles.info/title/Factors-that-Affect-Foreign-Exchange-Rates/ Comparative Advantage. (n.d.). Library Economics Liberty. Retrieved from http://www.econlib.org/library/Topics/Details/comparativeadvantage.html International Trade. (n.d.). English-Online. Retrieved from http://www.english-online.at/economy/international-trade/international-trade.htm Smith, E. (2011). What Influences Exchange Rates? E-How.com Retrieved from http://www.ehow.com/about_4597985_influences-exchange-rates_.html Suranovic, S. (n.d.). Definition of Absolute and Comparative Advantage. International Trade Theory and Policy. Retrieevd from http://internationalecon.com/Trade/Tch40/T40-4.php Read More