International Economics - Essay Example

Services sector as it contributes almost 78 percent in U.S economy. If U.S. or for that matter any of the developed countries such as UK, France, Germany, Japan has to increase the international trade, their contribution has to come through the services sector because they are dominant contributors in the GDP. The reasons that services cannot be traded as freely as goods can be are attributed to the following. 1. Many services are non-transportable; it requires geographic proximity between producer and consumer countries. 2. Many services cannot be mass produced; mostly they are tailored as per the geographical needs posing a difficulty in the international trade. 3. Many services go along with the supply of the goods and they cannot be separated to impart the benefits to the consumers.

Example is cars imported from Japan or China into US with 3-4 years warranty. Servicing cost is included in the original price. 4. It is difficult to export the services from developed countries (U.S) to developing countries such as India. The reason is that the cost of producing the services in a developing country is much lower than the cost incurred in developed economies. The glaring example is IT (Information Technology) services outsourced to countries like India, China where the cost of production is much less. Answer 2. Difficulties in the Balance of Payment (B.O.P) of the U.

S in the present time US is facing Balance of Payment problem since last many years and it is steadily increasing from 1 percent in 1995 to almost 8 percent of the GDP now. The reasons for such high deficits are many and varied and can be enumerated as per the following. (Riley, Geoff 2006) 1. It is an indication of high consumption with a weaker industrial sector. Consumers are spending beyond their means leading to higher household debt. 2. A trade deficit is also an indication of loss of employment and output.

It is a net leakage between income and spending. 3. Currency value (read $) comes under pressure against other leading currencies and continue to depreciates as deficit continues or rises. This also necessitates an increase in interest rates by the central bank. Answer 3. Compare and contrast the structure of the E.U and the USA (NAFTA). NAFTA (North American Free Trade Agreement) is a treaty between Canada, Mexico, and the United States. NAFTA has been operational since 1994. It governs the entire North American trade.

NAFTA agreement has removed the tariffs between the member countries Mexico, Canada, and U.S for goods shipped between them. This has resulted into the purchase of goods by Mexico in large quantities from U.S. This results into savings for Mexican companies on imports and it saves American company considerably on shipping costs. In contrast, EU has large number of member countries in it fostering similar cooperation among them. The major difference between these two is that EU members trade in a common currency but NAFTA members do not have any common currency.

Moreover, EU has its own political charter in contrast to NAFTA who does not have any. Answer 4. Explain Ricardo’s theory of trade and compare it to the H-O theory of trade? The theory of comparative advantage is behind the international trade in which both the countries benefit from the trade. Ricardo explained this in his book on the Principles of Political Economy and Taxation giving example of England and Portugal. Portugal produces wine and cloth with less labor compared to England for the