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International Trade Simulation - Assignment Example

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International Trade Simulation One advantage and one limitation of international trade While engaging in trade with other countries, Rodamia may have to face the issues regarding the valuation of its currency against the valuation of the currency against other countries…
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International Trade Simulation
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International Trade Simulation One advantage and one limitation of international trade While engaging in trade with other countries, Rodamia may have to face the issues regarding the valuation of its currency against the valuation of the currency against other countries. The currency of Rodamia must be either strong or at par with the valuation of other currencies otherwise the consumers of the country will not be able to purchase goods in the global economy. A strong currency boosts the confidence of the consumers and acts as an encouragement to the investors. Investments in the business growth will act as the catalyst to spur growth and will encourage expenditures among producers as well as consumers. Opening up of trade will provide wider product choices in front of the consumers causing demand for goods to take the steep rising curve. The producers and the consumers will accrue the benefits. The country can gain comparative advantage by specializing in one product and mitigate the losses. The competitive exchange rates regime will ensure the consumers of the country to afford the imported goods and sustained flow of investment will pave the path for future success. Two or more countries involve in trade as there is lack of resources n one country. There are many advantages as well as limits that are concerning trade. Benefits are accrued to each country but there are additional limits that need to be managed by international trade. One of the advantages of international trade is that it opens up choices for each country. A country can impose barriers to trade or can engage itself in free trade. Again a limitation that can be accounted for international trade is the time a country decides to lay down tariff or quota on another country. It may be the case that the decision is not good enough and the country that took the decision has to accept it without any choice. The generation of imports will influence the economy under consideration. It may influence the tax base. No economy is engage in trade causing deficits in the budget. The country can take the initiative to impose tariff barriers with the aim to protect the domestic producers. Absolute and comparative advantage Absolute and comparative advantage is two important terms in international trade. The concept of absolute advantage states the country of Rodamia can produce more goods using the same resources as that of another country. The country will gain by specializing in that good that has comparative advantage from the other countries (Maneschi, 1998). The country must produce and export that good where the opportunity cost is lower compared to the other countries. Such strategies will allow Rodamia and the trading partner to generate best economic welfare. The effects from trade can be determined by comparing the domestic price without trade with the prices prevailing in the global market. If the domestic price is low the country has the comparative advantage to become the exporter whereas high domestic price implies the opportunity for the country to become importer (Peng, 2010). The concept of comparative advantage has its role in the total production costs of the good or service. Influences affecting foreign exchange rates The exchange rate can affect the international trade. The exchange rate can be defined as the country’s price with respect to that of another country. The exchange rate is determined by the supply and demand forces within an economy. The conditions in the international market also determine the regime of exchange rates. The interest rates can also affect the exchange rate through a chain reaction. The chain starts from the rise in the rates of interest which will lead to higher return on the bonds as well as for other securities of the government. The chain also contributes in attracting financial capital from other nations. If the exchange rate of one country is lower than that of the other country then the consumers of that country will suffer from the incapability of purchasing the imported good. As a result the demand conditions suffer. Again if the exchange rate is higher compared to other nations investments cannot be expected to flow in and therefore the economy as a whole can be under threat. Therefore it is necessary for Rodamia to keep the exchange rate at such a level that matches the exchange rate prevailing in other countries. References Maneschi, A. (1998). Comparative Advantage in International Trade: A Historical Perspective. UK. Edward Elgar Publishing. Peng, M. (2010). Global Business. UK. Cengage Learning. Read More
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