International trade - Term Paper Example

Can you explain why? Trade restrictions are put by government including tariffs, import quotas and trade barriers. This is done to increase net exports by limiting imports. When net exports increase it creates a more favorable balance of trade, the domestic production of the country boost up, which results in increased domestic income and employment. But Most economists realize this argument is wrong because trade restrictions can prove to be harmful as well, if there will be trade restrictions the domestic prices of the goods will increase, and people will be forced to pay higher prices for the domestic products, also the countries won’t be able to benefit from “Comparative Advantage”.

Putting trade restrictions won’t only be harmful for the customers but it will also be harmful for the firms because usually they take advantage of Comparative Advantage and import raw material that are not available in their country, but by putting trade restrictions they will have to find that certain raw material in their own country which will eventually cost them more and it will ultimately effect the price of the final goods, making it more expensive. In long run Trade restrictions can also gives fewer choices to the customers and no variety because they will only have the option to buy the domestic products.

Also putting trade restrictions would result in inefficiency from the domestic producers because there won’t be a competition on a global scale and their productivity will decrease. Also International trade is the basic source of bringing “FOREX” in the country. By putting trade restrictions the country won’t be available to avail from all these advantages. 2) Suppose that in the absence of trade, the Canadian price for bicycles was higher than the world price for bicycles. Would allow international trade mean that Canada would import or export bicycles?

Who in Canada would benefit and who would lose with a free trade policy, and would the gains be greater than the losses?  Free trade policy is also called “laissez-faire” which means there won’t be any interference from the government side, and manufacturers are free to import and export and manufacture according to their own will. If Canadian price for bicycles is higher than the world price for bicycles then Canada would advantage from “Comparative Advantage” and import bicycles rather than exporting it.

Allowing trade would benefit Canada in long run because domestic prices for bicycles are higher than the world price and the citizens of Canada are paying higher prices unnecessarily, Trade will increase competition in Canadian bicycle market and it will help in reducing monopolistic pricing and the cons that generate from that. It will also encourage local investors and manufactures to perform better and keep stable bicycle pricing in the market. It will also increase the variety in Canadian bicycle market and citizens will have more options.

Also this will benefit the local producers as they can import raw material for bicycles from other countries who are selling it for cheaper rate and this will help lower marginal cost and decrease the prices of bicycle in Canada. 3) What benefits are to be gained from countries producing according to the law of comparative advantage? What if a country is absolutely more productive in all goods?