Efficiency Gain of International Trade Essay

International trade affects the economy by increasing the Aggregate Demand (AD), and by becoming a source of inputs for production. International trade based on the theory of comparative advantage will improve efficiency in allocating resources, as well as allow businesses to reach economies of scale - "the situation in which costs per unit of output fall as output increases", consequently reaching competitive prices of international markets (Colander, 2004, p. 428). When an economy involves itself in trade, under the right circumstances, it is able to shift the Production Possibility Curve (PPC) curve outward, and achieve greater levels of output. This increase in production can be achieved through the use of more resources

Answer the next question on the basis of the following production possibilities tables for countries Alpha and Beta:

Some Major benefits of international trade include the reduction of poverty, expansion of business opportunities for local companies and reduces costs for consumer.

A larger developed country will have numerous products it produces and exports. A surplus of imports, as one may imagine, can be disastrous.

19. _______ is a situation in which one country is more efficient at producing a product than any other

Two countries, Athens and Troy, produce two goods, ships and food, according to the following production functions:

Imagine initially that the two countries are not trading and that they are each producing at point ‘c’ and keeping all their produce for themselves. Do you think the two nations can benefit from specialization and trade? Explain your answer using the concept of comparative advantage and opportunity costs. First, identify the opportunity cost for each country in each good, and then say which country has a comparative advantage in which good. Note if both countries fully specialize at point e there will be less teacups in the market than prior to trade. Note that Ying at point d and Tai at point e in fact guarantees a gain from trade. Drawing and recognizing the PPF correctly also counts. 4. Using the appropriate diagrams, detail the impact on the

Some of the countries with surplus commodities may dumb them on international markets at a low price. Under such conditions, some of the efficient industries can might find difficulties in competing for long period. Furthermore, countries whose economies are mostly rural will face unfavourable terms of trade. For example, ration of export prices to import prices. Which means that their export income is more smaller than their import payments the make for high value added imports, as it leads to subsequently large foreign debt levels.

Trade freedom is a highly important factor in determining economic freedom and wealth. No one single country has the resources required to sustain the current standards of living in developed or developing nations. Trade requires specialization according to a country’s comparative advantage. Specialization allows the most efficient and effective use of a country’s scarce resources, whether that be natural resources or labor resources. The Index shows the economic benefits of specialization and trade.

4. Production outside the production possibility curve would currently be unattainable. The production that is attainable is inside of, on the shape of, or on the line of the curve. Technological changes such as production methods, could allow for attainability of production outside of the curve, as technological advancements may allow production of more guns and butter. International trade permit consumption also allows for production beyond the possibilities curve, in that the country being traded to may specialize in guns and butter. We could trade something that we produce at a very low opportunity cost, therefore making production of guns and butter cost less. (McConnell, Brue, Flynn 2015)

Also to boil down to form a question whether the scales of production effect hold?

A country is said to be more productive than another country, if it can produce more output (goods) for a given quantity of input, such as labour or energy inputs. An example is that there are only two countries, Australia and Japan. They both produce computers and wine, and only one factor of production, labour. Japan produces 6 computers for every 1 bottle of wine, where as Australia produces only 4 computers for every 3 bottles of wine. This suggests that Australia should export some of its wine to Japan, and Japan should export some of its computers to Australia. Australia has an absolute advantage over Japan, when producing wine, and Japan has an absolute advantage over Australia, when producing computers (Gandolfo, 1998).

Factors of production impact the fabrication of commodities. These factors are the inputs for the creation of goods and services applied to make an economic profit (Investopedia, n.d), and fall within four categories—land, labor, capital, and entrepreneurship (Nickolas, 2015). Understand-ing these inputs is paramount as incremental changes in a cost structure can determine a profit and a loss (Mohr, n.d.).

Increasing returns are the natural outcome of decreasing output costs and have external and internal factors which influence economies of scale (Ossa, n.d.). Economies of scale are influenced externally by industry size, rather than firm size and include

In general the production functionsof Welfens and Jasinski describing the economic growth in the recipient country can bedefined by the following equation[61, p.254]: