Business and economics
Question 1:
Use the Production Possibilities Curves for U.S and Mexico to determine
- In what commodity does the United States have a comparative advantage over Mexico?
Wheat.
- In what commodity does Mexico have a comparative advantage over the United States?
Clothes.
- Compute the cost of producing one more unit of cloth in the United States and Mexico?
The opportunity cost of producing cloth in the USA
(100-0) = 1 ton of wheat
(100-0)
The opportunity cost of producing cloth in Mexico
(40-0) = 0.67 tons of wheat
(60-0)
- Define the following concepts:
- Comparative advantage
A country has a comparative advantage in the production of a commodity/ service if it can produce at the lowest opportunity cost, as opposed to producing other products.
- Absolute advantage
A country has an absolute advantage in the production of a commodity/ service if it can produce at a lower cost, as compared to other countries.
Question 2:
What are the benefits and costs to a nation that participates in international trade? Do the benefits outweigh the costs or do the costs outweigh the benefits?
A country that participates in international trade enjoys certain benefits and suffers various costs as well. Some of the advantages include the optimal use of available resources. The country specializes in the production of commodities in which it has an advantage. This leads to an efficient allocation of resources and minimizes wastage. Optimal use of resources increases the overall welfare of society and increases the real GDP of the country. Companies also become more efficient due to stiff competition. This increases the quality of goods produced. Consumers also enjoy wide access to diverse products at affordable prices, which improves their living standards. International trade promotes the exchange of technical expertise and development of new industries, especially in developing countries (Acharyya & Saibal 23)
One of the major disadvantages of international trade is that it can hamper the development of infant industries. Free trade exposes developing industries to stiff competition, which might ultimately lead to their demise. Unrestricted trade can also result in reliance on other countries for economic survival. Most developing countries are over-dependent on industrialized nations, who take advantage of their vulnerability and exploit them economically. Excessive involvement in international trade can also result in over-exploitation of natural resources. The depletion of such resources is harmful to economic growth. International trade also exposes a country to harmful products such as drugs, pornography, and so forth. Additionally, it can result in the erosion of a country’s culture and the adoption of foreign ways of life. Lastly, a country that is over-dependent on international trade can face serious hardships during times of conflict.
The benefits of international trade outweigh the costs. It promotes the growth of GDP, availability of commodities, efficiency, and so on. However, countries engaging in international trade should balance between the benefits and costs.
Question 3:
What are the different types of trade barriers? What are the arguments for trade barriers? What are the consequences of trade barriers?
Trade barriers establish curbs on international trade and lower economic efficiency. Barriers to trade are either natural, tariff or non-tariff in nature. Natural barriers to trade include distance, language, among others. Tariff barriers involve the imposition of a tax on a commodity. Tariffs make imported goods costlier than domestic products. They help protect domestic industries from foreign competition.
Non-tariff barriers are used to check international trade, without the imposition of additional taxes. They include import quotas, subsidies, voluntary export restraints, embargos, import and export licenses, currency devaluation, among others. These barriers increase the difficulty of carrying out international trade. For example, import quotas limit the quantity of a commodity that can be imported, while embargos place complete bans on importation or exportation of a product.
Proponents of restrictions on international trade advance various arguments. The protection of infant industries is one main reason. Barriers to trade shield struggling domestic industries from unfair foreign competition by making imported products costlier (Hill & Hult 19). Trade barriers also help secure domestic jobs. These barriers increase the cost of imported products, which promotes the consumption of local products and consequently protects the jobs of domestic workers. By discouraging imports and encouraging exports, trade barriers also help improve a country’s trade deficit. Barriers to trade such as tariffs help a country generate more revenue through the collection of taxes. Trade barriers also enhance military preparedness and help to prevent dumping.
Trade barriers have various consequences. Most importantly, they discourage free trade. The comparative advantage principle is most effective when free trade is possible. Barriers to trade make this impossible. Barriers to trade such as tariffs increase the price of commodities. This lowers the purchasing power of consumers and makes products unaffordable. Tariffs and other barriers also limit consumer choice by reducing the variety of commodities from which customers can choose from (Agarwal). Lastly, the infant industries that governments seek to protect may become too comfortable and fail to make improvements required to compete efficiently. Such industries may eventually become reliant on the government for survival.
Work Cited
Agarwal, Prateek. “Trade Barriers.” Intelligent Economist, 28 July 2019, www.intelligenteconomist.com/trade-barriers/.
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Hill, Charles W. L, and G T. M. Hult. International Business: Competing in the Global Marketplace. , 2017. Print.
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Acharyya, Rajat, and Saibal Kar. International Trade and Economic Development. , 2014. Print.
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