Economic Concepts Underling Free Trade - Essay Example

ECONOMIC CONCEPTS Economic Concepts [Insert Your First and s] [Insert of ECONOMIC CONCEPTS 2 This paper explains five economic concepts underling free trade: opportunity cost, elasticity, comparative advantage, common resources, and public goods. ECONOMIC CONCEPTS 3 Economic Concepts Introduction Trading freely is as a contentious as an issue could be. The popularity, if any, of neoliberal economic applications as sound - and inevitable - economic policies has brought "free trade" into fore such as to bring up a whole set of associated concepts. Strikingly, as "common" as such concepts are traded - freely - in public and more specialized debates, insights are few as to how such grand-style concepts are anchored to basic human activities, economic ones included. Thus, what follows is a highlight of five economic concepts - opportunity cost, elasticity, comparative advantage, common resources, and public goods - integral to free trade as an (economic) activity not limited to nations but reaches far beyond to individual lives. Free Trade and Five Economic Concepts Free Trade Basically, "free trade" can be seen as exchanging least value (i.e. money, cash, credit, etc) for optimum services or goods. That is, on an individual's level, a person wishing to wash and iron her pants, for example, is going to send her pants to a laundry rather than wash a pair of pants herself (Blinder, n.d.). In economic speak, choosing to produce goods and services domestically or abroad implies - given free flow of goods, services, and human ECONOMIC CONCEPTS 4 capital, considering cost-manageable export-import tariff and non-tariff barriers -concepts of opportunity costs, elasticity, comparative advantage, common resources, and public goods. Opportunity Costs (Shadow Price) Pants, once more. An individual choosing to wash and iron her pants is opting for resources (e.g. time and physical energy) channeled into an activity in which resources might be utilized differently. That is, in terms of economic benefits costs involved to "purchase" goods or services are not limited to strict monetary value but extends to cover a wide range of implied costs ("Opportunity Cost," n.d.). The (economic) decision by individuals as well as states is one, consequently, limited by what options individuals and/or states choose in order to maximize utility of an (economic) activity. In economic parlance, "opportunity costs" is an investment in present as well as future opportunities for most efficient allocation of resources. Strategically, a state's economic decision to invest in and master specific products, services, or industries is, in fact, an opportunity-costs option. A case in point is United State's investment in, say, computers vis--vis China's, say, focus on toys (Blinder). The concept of opportunity-costs is further nuanced, however. That economic activities exist for profit is a given. To realize profit such as to allocate resources most efficiently is basically weighing costs against benefits, which is ECONOMIC CONCEPTS 5 opportunity costs in essence. Yet, in order for an economic activity to achieve what is commonly known as "excess profit" - i.e. profit exceeding normal margins of profit in a given market - such an economic activity should meet a specific set of market supply and demand requirements ("Opportunity Cost"). This is more evident in (in)elastic products. Elasticity Necessity dictates consumers to add a product or service to or drop it off shopping carts. Consumers, put differently, choose to purchase a product or a service based on product's or service's necessity. Consequently, a product or a service is said to be "(un)elastic" if such a product or service is on low or high demand based on necessity. By default, A good or service is considered to be highly elastic if a slight change in price leads to a sharp change in the quantity demanded or supplied... On the other hand, an inelastic good or service is onein whichchanges in price witness only modest changes in the quantity demanded or supplied, if any at all. ("Economics Basics: Elasticity," n.d.) In terms of opportunity costs, a consumer or customer is most likely to allocate her resources (e.g. income) based on a product's or service's priority i.e. necessity such that as resources avails demand (i.e. investment in one product or service) increases and as resources slim demand (and supply) contracts i.e. investment in less necessary products or services decreases. A person who ECONOMIC CONCEPTS 6 sends her laundry for washing and ironing because, for instance, of lack of one primal resource such as time will do her washing and ironing herself given more leisure and, probably, an inclination for less obvious (economic) benefits (e.g. house chores as meditation exercise) - hence, a laundry's service is unnecessary. Moreover, price of laundering services is set for steady decline in response to decline in demand on such elastic services. (Consider elastic supply and demand of laundry services based around college campuses during exams and in less stressful situations.) Generally, three factors impact on a product's or service's elastic price ("Economics Basics: Elasticity"): Alternatives. Intuitively, a wide range of choices will drive an elastic product's price down. The opposite applies as well. However, consumers or customers will continue to purchase an inelastic product or service even if prices go up. Disposable income. As income increases demand on less necessary i.e. elastic products or services increase. The case for more necessary products or services is also true. Time. If a consumer's or customer's consumption or demand of a product or service is tied up to a specific behavior which is considered "necessary" (e.g. smoking, gambling, buying gadgets, etc) she will continue to purchase that product or service as long as she affords to purchase and ECONOMIC CONCEPTS 7 insofar as product's or service's necessity remains steady. The opposite is true as well. Comparative Advantage This is one most politicised concept of all economic concepts. Indeed, apparently simple, comparative advantage is a complex concept whose wider implications can serve as an indicative index for an economy's overall performance. Basically, comparative advantage is "what determines whether it pays to produce a good [or service] or import it." (Lee, n.d.). For example, U.S.'s capacity to produce quality goods and services as compared to a host of countries is indisputable. However, put in balance, many American goods and services are more costly to produce domestically than to import - hence "free" trade with other countries. One recurrent misunderstanding about comparative advantage is that outsourcing jobs to lower-paid workers in other countries or even domestically will lead to higher unemployment and will, moreover, lead to a steady decline of formerly highly-paid workers. In fact, well-paid workers will continue to earn as much as long as productivity levels are higher than competitors'. This applies to all products and services. After all, all costs are opportunity costs (Lee). That is, nations opting for domestic production as opposed to importation engage in an extensive cost-benefit analysis (explained in further detail under "Common ECONOMIC CONCEPTS 8 Resources and Public Goods") in which, aside from monetary values, implied costs (e.g. implications for investment exclusively as opposed to selectively in one specific sector or industry rather than another) are calculated. Common Resources and Public Goods Common resources and public goods are examples of goods that are rival in consumption but not excludable and neither excludable nor rival in consumption respectively. By "excludable" is meant people can be prevented from using such a good and by "rival in consumption" is meant one person's use of a good reduces another person's use of it (Mankiw, p. 226). Examples of public goods include: national defense, basic research, and fighting poverty (Mankiw, p.228). Examples of common resources include: clean air and water, congested roads, and natural resources such as fish, whales and wildlife (Mankiw, p.233). Though common resources and public goods seem unproblematic, pricing both is a major issue market alone cannot manage efficiently. That is, clean air and water are common resources but, if left to excessive use of all, will decline in quality since no supply-and-demand price signals clean air and water value (Mankiw, p. 237). Consequently, government's intervention can remedy market failure such as by a mandate on carbon emission audit. For governments, cost-benefit analysis of public goods is an issue. In essence, "cost-benefit analysis" is an opportunity costs analysis in which present ECONOMIC CONCEPTS 9 and future, explicit as well as implicit benefits of an undertaking are weighed against present and future, explicit and implicit costs for concerned constituencies and in consideration of potentially alternative undertakings. For example, a public project such as a dam is one whose benefits and costs cannot be decided as privately-owned goods can be according to market mechanisms. Because no price signal marks a public good weighing costs against benefits of a public good is at best an approximation (Mankiw, p.231). Moreover, opportunity costs considered, a dam is just one alternative a government may have as opposed to, say, weighing costs and benefits of installing an exemplar healthcare system in a "politically significant" state's. Conclusion In balance, concepts such as opportunity costs, elasticity, comparative advantage, common resources, and public goods are a reflection of individuals' as well as states' strategic options in which costs are weighed against benefits of trading freely with one or more parties. On an individual level, individuals usually ignore externalities to preferred options (e.g. costs of public goods and common resources such as clean air and water and wildlife), which requires government's intervention in order to "ration" public use of public goods and common resources, for example. On a state level, states engage in "free trade" in order to maximize benefits of comparative advantage, weighing opportunity costs of producing one ECONOMIC CONCEPTS 10 good or service or another, often holding sway over international markets, more specifically in case powerful economies, in order to create a necessity local demand for goods or services perceived as unnecessary, and hence elastic, in increasingly "globalised" markets. ECONOMIC CONCEPTS 11 References Blinder, S. A. (n.d.). Free trade. In The Concise Encyclopedia of Economics. Retrieved from http://econlib.org/library/Enc/FreeTrade.html Economics Basics: Elasticity. (n.d.). In Investopedia. Retrieved from http://www.investopedia.com/university/economics/economics4.asp Lee, R. D. (n.d.). Comparative advantage part 1/2 [PDF]. Retrieved from http://www.commonsenseeconomics.com/Readings/Comparative%20Advantage.CSE.pdf Mankiw, G. N. (2007). Principles of economics. Ohio: Cengage Learning. Opportunity cost. (n.d.). In Economist.com. Retrieved from http://www.economist.com/research/Economics/searchActionTerms.cfmquery=opportunity+cost Read More