The International Trade - Report Example

Introduction The International trade simulation portrays how the trade between two or more countries happens and it provides an outline of the implementation of trade restrictions and tariffs. For negotiating on the international trade agreements, completion of a trade simulation is important. The country of Rodamia shares the borders with the countries Uthania, Suntize and Asfazia and Rodamis is the largest among these four. The trade simulation for Rodamia shows the trade co-ordination with other countries especially these four neighboring countries. Like many of the developing countries, the major contributor to the Gross Domestic Product in Rodamia is Service sector (about 66 percent) while poultry and tourism gives the share of 30 percent of GDP while remaining 4 percent is contributed by the agriculture sector. The Case of Rodamia’s Trade Simulation Rodamia has been bestowed with vast resources which are highly valuable to the country and the rest of the World who come trade with Rodamia. The need for more channels for trade and domestic development paved the way for expanding the international trade of Rodamia. The trade simulation in Rodamia opens with consideration of the Government on encouraging the trade relations with its neighboring countries. As a preliminary step to the process of trade simulation, the opportunity cost of each product is to be calculated. This calculation would be on the goods that Rodamia presently produces. The opportunity cost may be defined as the amount of production of one item that has to be sacrificed in order to produce the same amount of another item. For example, land can be used for growing corn or as grazing fields for cows. The use of one item prevents the other. The set of combinations which show a country’s full utilization of all assets are called the Production Possibilities Curve (PPC). The Production Possibility Curve is evident in the simulation. PPC presents all the possible combinations that may be made for the production of a given number of products which are produced out of the given number of inputs. In 2004, the opportunity cost for corn and cheese in Rodamia is 1:2, that is, in the place of the production of one unit of corn, 2 units of cheese can be produced. The opportunity cost ratios in Uthania and Alfazia are 1:1 and 1:1.5 respectively. This means that comparing to the neighboring countries, Rodamia will be benefited by importing corn and exporting cheese. Hence, the advantage of international trade of one country basically lies on the opportunity cost principle. The opportunity cost mainly depends on the factor endowments and comparative advantage principle. Thus, for the application of simulation, comparative advantage and marginal opportunity cost principles are the two important lessons to be noticed. Apart from these two principles, simulation emphasized production possibility curve and limitations on international trade. Trade simulation works on these four key points. Comparative Advantage and Absolute Advantage The comparative advantage of factors or resources allows the countries to be efficient in producing commodities. According to comparative advantage principle, a nation exports the commodities which are produced out of its relatively abundant and cheap factors or resources and imports the commodity which is produced out of relatively scarce factors or resources. In another words, relatively labour abundant country exports relatively labour intensive commodity and imports the relatively capital-intensive commodity. The theory implicates two things: first, different supply conditions in terms of resource endowments explain comparative advantage and second, countries export goods that use abundant and cheap factors of production and import goods that use scarce and expensive factors. Each country is different in having different set of advantages like rich mineral deposits, good climate and land suitable for cultivation, good infrastructure, availability of skilled labours, and so on. By considering all the resources, each country will have comparative advantage in the production of some goods in comparison to the other goods. Here, the ideal situation for Rodamia is the import of corn and export of cheese (as we looked at the case of corn and cheese in Rodamia in the previous section. International Trade and Exchange Rate One of the important factors which affect the international trade is exchange rate. One country’s price of currency in terms of another country’s currency is defined as exchange rate. Market forces of demand and supply and the international market determine the exchange rate. The exchange rate can be affected by interest rates through a chain reaction. That is, the chain leads to the increase in interest rates and which again leads to the higher return from bonds and other government securities. Advantages of International Trade The simulation of international trade has brought out several advantages. Firstly, the country can concentrate more on production of goods in which they have got comparative advantage. If a country has the comparative advantage in the production of one particular good, it means that opportunity cost of that particular thing is lower. Secondly, Even if, a country has the absolute advantage in the production of a particular commodity, it will gain out of the import of that commodity from a neighboring country in which the same commodity can be produced at lower opportunity cost. Thus instead of producing each and every commodity within the country, the country can simply produce commodities which can be produced out of comparatively advantageous factors and the country can import the commodities for which they have not got comparatively good position. Thirdly, international trade opens the doors of global market and it will also increase the domestic competitiveness. Thus, the sales and profits of domestic firms will increase. Fourthly, international trade gives access to foreign technology. Simulation creates a lot of opportunities for employment. Lasty, but mostly, simulation stabilizes the seasonal market fluctuations. Limitatiosn of international Trade Firstly, international trade will affect the firms which produce the commodities that the country has selected for the import. It is natural that the neighboring countries will be able to produce at cheaper prices and price of the commodity will be lowered like anything. Then, the country will become the dumping place of low price goods from the neighboring country. If the example of Rodamia is taken, Suntize has been dumping watches to the home market of Rodamia. Another limitation is that tariffs or quotas may be introduced. Through quotas or tariffs, the infant industry of the home country can be protected. However, the quotas may lead to the increasing domestic prices. International trade promotes competition and the domestic companies may not be so competitive. Hence it may affect the existence of the home firms. The major limitations of international trade are tariffs, quotas, regulations. These limitations give protections to the infant industries in the home country. But these protectionist policies may be resulted in the negative results and these may retaliates for political differences. Conclusion By international simulation, the effects of international trade may be demonstrated. It shows the advantages and disadvanges of international trade. A country may be missed out the opportunities for the improvement if the countries have not developed a free trade agreement. Reference Dixit, A. and Norman, V. 1980. Theory of International Trade. Cambridge: Cambridge University Press Jones, R. 2002. Heckscher-Ohlin trade models for the new century, in Bertil Ohlin: A Centennial Celebration, MIT Press Jones, R. 2006. Protection and Real Wages : The history of an idea. Japanese Economic Review. 57, 457-66.       Read More