International Trade Simulation and Report

These models immediately established the idea that countries specialize and trade, not only because of underlying differences, but also because increasing returns are an independent force leading to geographical concentration of production of each good. Indeed, at a logical level, increasing returns are as fundamental a cause of international trade as comparative advantage. (Krugman P. R., 1987, p. 133).

In the “Rodamia and its neighbors” trade simulation, I came across a few advantages and disadvantages of international trade. First let’s talk about the simulation itself. The first step of the trade simulation involved deciding whether to import or export corn, cheese, DVD players, and Watches. I decided it was best to import corn and watches and export DVD players and cheese. This was an easy simulation because all I had to do was decide which items we had a comparative advantage with and which countries offered the best products at a lower opportunity cost. Even though Rodamia does not have the absolute advantage on corn or cheese, I was able to help maximize the countries benefits by specializing in the production of cheese which gave us a comparative advantage.

They each specialize in something or the other. For instance, Canada is a resource rich economy; it exports many of their natural resources to other countries whose economy doesn’t have a strong sector in natural resources, and likewise imports other goods/services from them. Therefore, Global trade, to some extent, is very crucial for all countries – regardless of developmental status. It makes greater sense to always trade with other nations. International trade allows each nation to specialize in a good or service that they produce best. Two economic concepts are needed to understand the issue fully: Comparative advantage and absolute advantage (Frank, Bernanke & Osberg, 2012, P. 31). Comparative advantage is when each country concentrates on the activities for which their opportunity cost is lowest, and their overall output is maximized (more productive than the other nation in that particular good/service) (Frank et al, 2012, P. 32). These depend on a country’s accumulated physical and human capital, difference in cultures & social institutions, as well as many other factors (Frank et al, 2012, P. 34). This concept encourages countries to specialize in the production of goods and services in which they have a comparative (also called as competitive) advantage in. On the other hand, Absolute advantage is when one country as a whole can produce more of a certain good/service faster than the other (takes relatively less time to produce) (Frank et al, 2012, P.

The aspects of trade are always dynamic. When a particular country is producing a given good better than another country producing another different good (with the assumption that each demands for both goods), they would easily trade. However, a challenge comes when one country produces both goods in a better way than the other country. Such a shift in the aspects of trade focuses on the differences between the theory of comparative advantage versus opportunity costs (Ruffin, 2002).

According to Adam Smith 1776) in…... a country has an absolute advantage in producing the product when it is more efficient in making that product than any other country. If two countries specialise in producing different products and trade amongst themselves, both these countries will have more of both products available to them for consumption (in which each has an absolute advantage)

International trade is the exchange of goods, services and capital among different countries (Wild, & Han, 2014). International trade is significant as it accounts for a substantial part of the nation’s GDP; therefore, every state support it. However, international business can be beneficial to the consumers or the producer, but at the same time, disadvantageous. For instance, in the situations where the world prices are below the domestic prices, the consumers will get the same commodities at a reduced price. Again, customers will have a greater variety of the same products and services; hence, they will end up with the best commodities in the market.

Several theories about international trade explain why countries have the opportunity to trade, theory of comparative advantage and absolute advantage. Adam Smith came up with the theory of absolute advantage where the country that produces more of one good that another country has simply an absolute advantage over it. This theory normally constructed with two commodities and two countries. In Schuhmachers article “Adam Smith’s theory of absolute advantage and the use of doxography in the history of economics” he says, “each nation can produce one good with less expenditure of human labor than the other and thus more cheaply.” (Schuhmachers, 2012) In this case, both countries will specialize in only producing the commodity, which they have

When we look around our homes we tend to forget that the items we have purchased often are items we as a country have received from other countries. We forget that the clothes we are wearing may have come from China or the TV we are watching our favorite shows on came from Japan. International trade has advantages and disadvantages for everyone involved. It wasn’t that long ago that the items we owned only came from within our own country. So why is it that international trade exists and what advantages does this bring to a developed country and what advantages does this bring to a developing country? International trade also has its downfalls. In the following assessment I will look at both the advantages and disadvantages of international trade and how we, as a developed country, are using trade to help developing countries become less dependent on aid to fund development projects in utilizing programs such as Aid for Trade.

In such a setting then, the countries would best decide to produce the items for which they possess a comparative advantage, and then exchange them within the international market place, for items for the production of which they do not possess a comparative advantage (Pullen, 2006). Today, the application of the comparative advantage is revealed mostly at the level of the leading economic powers in the world, who seek to create advantages in terms of exports, and as such maximize their gains (Acharya, 2008).

The theory of comparative advantage is perhaps one of the most important concepts in international trade theory.

Most countries are dependant on international trade and the government plays a big role in this through forming their trade policy (Miller, 2010). In the past smaller countries have relied on trading with bigger nations, but in the mid-1960’s a lot of countries looked to pursue independence in their foreign policy. Even though we live in this new technological and global age, forming trade relations is vital to our economy. Every country has different trade policies which determine how trade occurs between themselves and other countries. The government has various roles in its policy and even though there is a lot of debate over what this should be exactly, the highest amount of benefits occur when they strive for free and open trade. The success of our countries economy in terms of both growth and development depends on the government’s commitment to its minimal role of encouraging international trade through forming closer economic relations.

The different modes of international transactions tend to differentiate between two different trades, which has driven by Inter-Industry specialisation and this has been driven by Intra-Industry specialisation. Inter-Industry specialisation states that past models of trading focused on the form for specialisation that could occur when countries specialised in the production of various types of goods example country ‘A’ produces cars and country ‘B’ produces wheat. Countries will specialise in the production of goods that are relatively cheap for them to produce, either because they have a technological or resources which other country might not have advantage in the production of that good, or because they have an abundant supply of the factors that are used to produce it. This reasons could give those country a comparative advantage in the production of that good, trade should be greatest between countries that have the largest differences in technology and resources or factor endowments. One way to see these that how much an economy has specialised in the

The importance of international trade in the world has been widely studied and also examines the role of international trade in the various issues. Mainly my paper focused on the relationship between Economic Development and international trade, disadvantages of international trade also discussed. International trade is an activity of strategies importance in the development process of a developing economy. International specialization means that different countries of the world specialize in producing different goods. Trade policy formulation and implementation covering issues such as tariffs, incentives, quotas, taxes, customs and administration, subsidies, rules of origin, public procurement regimes, aid and investment, export promotion, trade facilitation and diversification. The role of foreign trade in achieving a quicker pace of economic development is thus well recognized. Hence, planning of foreign trade cannot be divorced from the strategy of overall development. The disadvantage of international trade is that the welfare of the people in nations that produce goods and services is sometimes ignored for the sake of profits. In conclusion it can be said that, international trade leads to economic growth provided the policy measures and economic infrastructure are accommodative enough to cope with the changes in social and financial scenario that result from it.

There are several theories about international trade. Through these theories, there seems to be closely linked and each one deriving from one another.

In the globalization era nowadays, trading has become an important activity across all regions. Trading is known as an exchange of good and services from country to another country. Commonly, trading is necessary due to the limited resources are scattered unfairly between other regions and some countries are better producing products than other (Lipsey R., 1960). However, trading not solely occur to the scarce resources but also happens to other country that can specialize in similar goods and services. For instance, Malaysia and Thailand are better in producing rice but yet they do trading of rice with one another. This trade action is known as intra-industry trade. (Krugman P.,1991) stated that intra-industry trade is a two-way trade in similar goods or in other words known as an exchange of similar goods between countries in same industry.