International Trading - Term Paper Example

Peace and stability, interdependence and spread of ideals viable for business expansion are threatened thus reducing the country’s real Gross Domestic product (GDP).Low GDP implies low investments which implies low incomes thus devoting little saving for business expansions. This has devastating macro-economic effects on aggregate demand thus threatening job creation in a country. Trade barriers also reduce benefits accrued to consumers and limits production efficiency due to low competition.

Low quality products supplied to the market lowers utility for consumers. Question Two Allowing international trade in Canada will mean it will import bicycles. The reasons are that the imports are cheaper than the exports due to comparative advantage. In a real world situation, black markets situations may result threatening the survival of domestic industries. The producers and manufactures of bicycles in Canada will suffer as rational consumers will obviously go for the cheaper imported bicycles than their own expensive ones.

This will reduce demand for bicycles thus reducing profits. This will later threaten jobs and incomes firms will be earning. In addition, the government will have to suffer economically in importing bicycles, subsidizing them or even meeting the higher cost as a result of inflation. On the other hand, consumers will benefit as they will find imported bicycles cheaper than their own home-made thus benefiting from income and substitution effects. Generally, the loss will be greater than gains due to additional social costs associated inflation, market imperfections and allocative inefficiencies.

Question Three Comparative advantage has numerous gains. First, it enables a country to specialise in production of a certain products and services due low cost of factor inputs. It also leads to high quality products and high-knowledge services than their competitors in the market. This leads to an improvement in allocative efficiency and economic welfare. It also makes a country to gain from international trade skills, knowledge and technology and can set standards in the international markets.

It has high chances of creating monopolistic market situations due high costs of production its competitors. This can make it set prices and reap all the supernormal profits. It is noted that there will be production and consumption gains from comparative advantage as consumers will spend less in maximizing their utilities. If a country has an absolute advantage in all goods, first, there will be no trade. This implies that in the long run, trade deficits due to lack of new tastes and preferences.

Through trade, all countries will benefit due to comparative advantages. However, in the real world it is difficult to encounter such an ideal economic situation. Question four. Factor prices are unequal because of the following reasons. First, population pressure on land causes the margin of cultivation to be pushed out. As agricultural yield increases, its prices sour higher due to higher manufacturing costs. Second, the differences between a country’s factor inputs, tastes and preferences, could cause a difference in prices of goods and services.

For instances, a country’s expenditure patterns might be different from another due to income and factor inequalities. Third, the means of production (state of technology) could have greater magnitudes