International Trade and Enterprise, the Theory of Imperfect Competition - Assignment Example

2) Discuss the theory of Imperfect competition and how it is related to Trade? Give 2 examples to illustrate your point of view. Discuss External economies of scale and Internal economies of scale and give example for each. Introduction Imperfect competition applies to markets with two or more sellers and buyers that have an output that is close but not identical substitute of each other. This helps to create a variety of products that satisfy diverse customer needs. This category of consists of oligopoly, monopolistic competition, oligopsony and monopsonistic competition. However, the first two market structures are the most common in the global market. Monopolistic markets are characterized by a large number of small-scale competitors each with a reserved degree of market control, especially the supply of major products. However, Oligopoly market structure comprises of few large-scale competitors, each with a limited influence on the demand of major products. This type of market leads to strong competition between the main operators because of interdependent decision-making exhibited in mergers. Manning (2003, p.13) argues that competitors in imperfect markets tend to form collusions that enable them to gain a higher degree of market control of supply and demand. A good example of an imperfect competition is the horticulture market. Flower growers in Holland and Finland produce different varieties of flowers to cater for the diverse need of their global clientele. In this, a rose flower has several species, which have distinct colors, suitable for different occasions. In these two countries, there is a large number small-scale growers who have a limited control of the market supply. Each farmer has the right to decide, which species of a certain flower to grow to meet the needs of his or her customers. This has assisted them to create products that are similar but, not identical substitutes of each other. In this type of a market, no grower has total control over the price charged per item. This is because consumers believe there is no price difference between the competitors since they are selling the same product. Finally, there are very few obstacles to entry and exit since each supply acts on their own will. External economies of occur outside a firm but, within an industry. They benefit the business indirectly by reducing its operating costs because of being part of that industry. For example, most governments are keen to provide incentives such as better transportation networks to serve developing industries in their countries. Companies operating within the industry benefit from the project indirectly as good transport networks reduce the cost of moving raw material and finished goods in and out of its premises. Likewise, the provision of a clean source of water reduces the cost of purifying water needed for production in beverage and beer companies. The concentration of similar companies in one location causes the relocation of component suppliers reducing the cost of transporting raw materials in bulk. The concentration of software firms in Silicon Valley in the U.S. influenced the growth of several electronic companies that use silicon chips as their raw material for their products such as computers. This has created a large ready market for chips being produced by companies located in this valley. However, internal economies of scale are the benefits a company enjoys for reducing its production cost per unit. Logically, as output increases, the cost per unit reduces due to increased efficiency in production. To survive in this tough global economy, companies are being forced to produce at a minimum efficient scale that lowers the average total cost. In most cases, large firms get discounts for purchasing raw materials in bulk. In addition, the interest rate of getting a loan is lower for large organizations since they have assets that banks can trust. Finally, a firm’s ability to bear losses increases as the firm grows since other part of the company can offer support. In essence, internal economies of scale become relevant as a company increases in size. For example, if a company average per 1 unit is 20 at the output of 200 units, the average per unit of production decreases as the firm expands in size. This is because the company is in a position to spread its risks since a change in inputs leads to an equal change in output. 3) Discuss underlying factors of Globalization. Who are the winners and Losers of Globalization? Why? Globalization is the process of international integration that arises from the interchange of ideas, products, worldviews, and different aspects of culture. The major issues affecting its development include the rise of the internet, advancements in telecommunication and transportation infrastructure. Several scholars argue that globalization traces its origin to the third millennium B.C.E. Improvements in transport and communication infrastructure supported the growth of international business at the beginning of the 20th century. The development of international business cooperation led to the genesis of multinational enterprises that have a global appeal and presence. As a way of surviving increased competition, a multinational corporation such as The Coca Cola Company sources its services, labor, goods, and materials overseas to improve their production technology and the quality of the product. The growth of faster means of transport for bulky goods enabled multinational corporations to source for cheaper raw materials in countries that produce it in large quantities. Globalization has led to the development of economic blocks and trading zones that provide opportunities for businesses to boost their output since they have a larger customer base. For example, coffee processors in the U.S. and U.K. import their raw materials from Africa where the supply is higher. In turn, the processed product is exported to other countries that do not have coffee at a profit. The internet provides tools for developing global information systems that assist multinational corporations to process global data to ease the process of decision-making. Globalization has popularized tourism as a leisure activity that supports exchange of ideas and worldviews. The winners of globalization are all countries and multinational corporations since they enjoy economies of scale when sourcing for raw materials or distributing the final product. The greatest losers are small enterprises that have been forced to compete unfairly with large multinational organizations. Short-term winners include manufactures who produce goods for export to other countries at a higher price and consumers who buy imported goods that are cheaper than goods manufactured locally. However, globalization negatively affects domestic producers of importable goods whose price is determined by imported goods. For example, American manufacturers have managed to expand their market overseas at the expense of local companies in countries they trade in. However, American companies also experience unfair competition from cheap imports from China that are cheaper than American products. 5) What are the implications of these trading blocs for international trade? How may they affect a firm’s investment decisions? Provide examples. Introduction Trading blocs are groups of countries, which are situated within the same geographical region and protect themselves from the influence of non-members, particularly concerning imports. Formation of trading blocs is a form of economic integration, which has emerged to increasingly shape world trade patterns. Examples of trading blocs are Free Trade areas, customs union, and Common Market. The European Union is a trading bloc that is not only the world largest, but also the second largest economy (Chase, 2005, p. 60). Discussion Trading blocs have had an enormous influence on international trade. The main motivation of establishing trading blocs is to compete with the outside world. This is important since before the establishment of such blocs, Western European countries were highly dependent on the United States. Following this establishment, the European Union has enabled these countries to attain political and economical independence. The fast development of Japan was another motivating factor that led to the establishment of the European Union. Through regionalization, the trading blocs have made trade to become more common and popular. All trading blocs have had the effect of changing the pattern of world trade and economy. The increase in dependence between member countries n the trading blocs and their ability to negotiate in the outside world has led to emergence of a keener competition in the world, and this is hazardous to globalization. This is because, through regionalization, trade barriers have been created. Despite the efforts of the World trade Organization in trying to eradicate trade barriers in various parts of the world, trading blocs are increasing them since it is their nature to give their member states more interest and prevent other countries from trading with them freely. Moreover, upon the satisfaction of their member states, they have succeeded at damaging the foundation of cooperation in the global front as well as an increase in difficulties while trying to negotiate trade between nations (Chase, 2005, p.52). Trading blocs and investment Trading blocs have the effect of increasing investment in the member countries. After a bigger market size is formed during the formulation of trade blocs, firms are provided with the incentive to set up other plants for serving local markets instead of exporting. Firms can benefit highly in case they are in a trading bloc, which has a large market size than the one with a smaller market size. Although these blocs promote internal investment where the member countries can invest without any restrictions, they impede investment from other external countries due to rigidities brought about by trade restrictions. Firms have huge managerial decisions to make in case they are located in countries, which have instituted trading blocs as these blocs have a tendency of influencing the manner in which business is conducted (Chase, 2005, p. 60). In summary, trade blocks are often established in order to protect member state from external influence. European Union is one of the trading blocs, which was established to protect western European nations from the influence of the United States. Trade blocs have enabled member countries to achieve political and economical independence and this has increased competition on the global front. Firms in countries that are members of trade blocs are faced with the need to make managerial decisions that influence the firms’ undertakings. 6) Discuss the Costs and Benefits of Tariff, purpose of Export subsidies in agricultural sector and how it can affect the international trade amongst Nations? Costs and Benefits of Tariffs Tariffs are taxes, which are imposed on imports. These taxes are used to put restriction on trade and they have the effect of increase the prices of imports. Subsequently, makes it expensive for consumers to buy these goods and services. Moreover, the increase in the cost of import causes a decline in consumer surplus. Consumers around the world have lost out due to tariffs imposed on agricultural products. Most of agricultural goods have become more expensive due to these high tariffs, which are usually placed in order to protect farmers (Wang, 2010, p. 171). Customers can acclaim hardly any benefits from tariffs. However, in the long run customers do benefit from protection of the domestic industries in case these industries use tariffs to help improve domestic producers involved in the production of the goods. Consumers benefit from tariffs in this way because their domestic production is made more attractive in relative terms when compared to imports. Agricultural tariffs have had the effect of benefiting farmers all over the world as they have protected the farmers from cheaper competition (Wang, 2010, p.172). Nevertheless, restriction of competition has the overall effect of encouraging firms to be inefficient. In the long run, domestic firms have a tendency of not making the improvements that are necessary without even the use of tariffs. In addition, the introduction of tariffs often leads to some form of retaliation where the affect countries formulate punitive measures targeting the countries that instituted the tariffs. Tariffs have the effect of increasing revenue for government albeit in small volumes. In case the tariff becomes too high, countries may fail to import important goods and hence the government may fail to get revenue from tariffs (Wang, 2010, p.172). Export Subsidies Export subsidies are subjected to numerous controls when it comes to the agricultural sector. These subsidies are reduced in order to achieve optimal results in agricultures whereby products do not go to waste. Export subsidies have the effect of increasing exports to the countries that are subsidizing. According to Wang (2010, p.172), exports subsidies in agriculture have had the effect of reducing commitments to agreements concerning issues that affect the agricultural sector. However, export subsidies have not mitigated harmful effects of agricultural protectionism as they have encouraged countries to shift support towards other external and internal measures. With increasing control on agricultural support being formulated, countries are becoming more successful in meeting subsidy commitments with support being unchanged. The European Union and the United States have been running governmental stocks for agricultural products by using export subsidies. In summary, tariffs are often imposed on imports in order to restrict trade. Upon the restriction of the tariffs, the prices of imports increase and this makes goods expensive for consumers to buy. Agricultural goods have become expensive due to the imposition of tariffs. On the other hand, export subsidies have had a widespread effect on agricultural sector as they have increased exports in the concerned countries. List of References Chase, KA 2005, Trading Blocs: States, Firms, and Regions in the World Economy, University of Michigan Press, Michigan Manning, A 2003, Monopsony in Motion: Imperfect Competition in Labor Markets, Princeton University Press, Princeton. Wang, N 2012, ‘The Relationship between Regional Trading Blocs and Globalization’, International Journal of Economics and Finance, vol. 2, no. 1, pp. 171-173. Read More