Global Economics: Trade, Cost and Pricing - Essay Example

Global Economics: Trade, Cost and Pricing The US tobacco Companies will subsidize farmers so as to get cheap supply of raw materials from these countries. This is also evident in that in developing countries labour intensive forms of production are cheap. In this developing countries labour is cheap, therefore developed countries prefer to get their raw materials whose production is labour intensive from the developing countries.Therefore, the US tobacco companies will subsidize tobacco farmers in developing countries in order to tap the comparative advantage.

David Ricardo came up with the theory of comparative advantage that can be defined as the ability of a country to produce a specific good at a lower opportunity cost than its trading partners.In the shorten tobacco farming in developing countries will be profitable, however, in the long run this may not be the case, this is because more farmers will engage in tobacco farming, and when this happens the supply of tobacco goes up beyond the demand for it and the price of tobacco will go down this well cause a loss to the farmers.Effects2. In the long run price of tobacco will down where the supply increases.

For the food items, the supply will be low and the prices will be high. This is explained by the fact that farmers will concentrate on tobacco production and abandon food products. This will cause a shortage of food items therefore, their price rises.Internationally, food prices will rise because the developing countries are the major sources of food products for international trade. This is due to shortages in the international markets.3. The following are the reasons why multinational companies invest in other countries;1.

To gain control over the supplies of raw materials found in abundance in particular locations.2. Cost advantage. If it's more cost effective to produce in particular area.(a) If it's cost effective to supply a local market with local production.(b) Low cost of labour.3. As a defensive measure- If its market share is threatened by the entry of a local firm 4. Trade barriers- So as to avoid trade barriers they set up facilities in foreign countries. Therefore, in our case where Acme motors produce only the engines in Nuevo Lavedo is because they will avoid trade barriers during transportation of their parts to other branches and this reduces the final cost of production.

It might also may be cheap to produce engines in Nuevo-Laredo than any other branch and this help reduce the cost of the final product.4. Acme motors would shift its product of engines from Detroit to Mexico and then shift the engines to the US.Import duties for goods from Detroit to the US are high than the import duty imposed on goods from Mexico. Therefore the company takes advantage by importing the goods from Mexico. This reduces the cost of the final product.5. Consumer gains and losses in this type of international production.

Consumer GainsDue to the fact that the companies produce at low cost and that they are competing with other firms, we expect that the companies will reduce prices. As a result the consumer's real income increases.Multinationals companies increase efficiency and flexibility of the World economy by making resource use. This will as a result increase the availability of various goods in a country thereby increasing consumer goods variety.LossesThe multinational companies may decide on prices of these goods and may exploit the consumers by charging high prices.

ReferencesHardwick P, Khan B, Langmead J, (1997), An Introduction to Modern Economics, Fourth Edition, New York, Longman Group UK Limited, Kenen, P. B (1994); The International Economy, 3rd Edition, New York, Cambridge University PressKirkaldy, A. W. (1929); The Romance of Trade, 2nd Edition, Britain, Devonshire Press, Torquay, Schiller, B. R. (1980); The Macro Economy Today, 7th Edition, New York, Von Hoffman Press