Eco_212_Trade_Simulation_Paper

International Trade Simulation and Rep International Trade Simulation and Report Introduction International trade is a common denominator in today’s economy. Various countries around the world participate in importing and exporting the goods and services demanded by their citizens; requiring an abundant level of careful considerations, restrictions, limitations, and government policy. The following is an a brief discussion of the advantages and limitations of international trade, detailed analysis of comparative and absolute advantage, foreign exchange rates, and the World Trade Organization. For further insight and review, the team’s concept summaries, Trade Simulation evaluation, and International trade debate will be discussed, concluding the International Trade simulation and report. Advantages and Limitations Studying the effects of International trade and determining whether or not a country should consider trading is important. One of the key factors to consider is that International trade allows for healthy competition and affords consumers the opportunity to choose. Another key aspect to consider is that trade allows for a country to specialize in the production of goods best suited for them and export those goods in exchange for goods the country has a difficult time producing. In essence, International trade offers exceptional opportunities to succeed for all parties involved and provides citizens with the best possible prices on all goods. However, restrictions and limitations exist that would prevent trade from benefiting parties involved. Tariffs, a fancy word for taxes, limit imports so that domestic suppliers of a particular good have the chance to compete; a benefit when used properly. More often than not, tariffs are used as a means of punishment. When tariffs are imposed, the exporting countries believe their products are threatened and retaliate by imposing a tariff on imports from that country. Trade relations slow down until both countries involved decide that the tariff has not been beneficial and the tariffs are removed; thus opening up free trade. Simulation Key Points International trade has many benefits and key points that must be taken into consideration: gains and losses, tariffs, trade restrictions, and free trade. Gains and losses can be summarized by how much the economy will gain to offset how much it will lose in trade. If the gains outweigh the losses, trade will be beneficial. The overall goal of trade is to raise the Gross Domestic Product (GDP) and sustain a healthy economy. The second key point involves tariffs; taxes imposed on a country’s imports. Tariffs are used to raise the cost of an import in order to give a domestic supplier an opportunity to be competitive in the same market. If import goods cost less than domestic goods, domestic companies will suffer causing a loss of jobs and eventually the business may be forced to close. Tariffs can provide opportunity for new or lesser businesses and assist in repairing a declining economy. Trade restrictions are the next consideration. When a country puts a trade restriction on the amount of imports, the exporter, in essence, is being instructed to only take a certain number of any given product during a given period. These restrictions force the exporter to produce less of the product which in turn hurts their country’s economy. Trade restrictions are normally the beginning steps towards a declining trade agreement; imposed when a country is in the early stages of a recession. The restrictions are a means of allowing domestic suppliers the opportunity to increase production and increase profits. Finally, free trade provides an open market to import and export freely. The best scenario for any country to be in, free trade allows countries the freedom to produce specialized products and export them to maximize sales. Although highly beneficial, free trade suppliers are at the mercy of the global market. The world price is the governing price so suppliers have to ensure that their production costs are minimized. Absolute and Comparative Advantage In the realm of international trade, certain advantages apply: absolute and comparative. In economics, an absolute advantage refers to the ability that a country or people within that country have to produce a large amount of goods or services with minimal resources required to succeed. The comparative advantage in economics consists of the same standards of production as the absolute advantage except that it exists with only one particular good or service at a lower opportunity cost than another person or location: opportunity cost referring to the benefits that were received by taking an alternative action (Mankiw, 2007). Along with the influences of different types of economic advantages within international trade, foreign exchange rates also affect the economy and some inductions will follow. Influences Affecting Foreign Exchange Rates Foreign exchange rates were designed for the sole purpose of being able to exchange one category of money for another, depending upon a countries current conversion rate. For an exchange rate to be calculated, various factors influence the rate at which the currency can be exchanged: inflation, interest rates, other more dominating currencies, and competitiveness. Low inflation affects exchange rates by increasing the currency value whereas higher inflation rates decrease the currency value. Interest rates work in tandem with inflation by way of manipulation; changing interest rates affect inflation rates thus raising or lowering the exchange rate. Sometimes exchange rates are compared to those from other countries based on the appreciation or depreciative values; the Euro is a good example of an ever-changing fluctuation in value. Lastly, competitiveness between countries can affect the exchange rate based on products and services that become more attractive in one market and less in another, which can weaken one rate and strengthen another (Van Bergen, 2009). Along with exchange rates and comparative and absolute advantages, international trade presents several additional issues. International Trade Debate and Simulation International trade has its share of debates; whether the trade is good for a country or detrimental to the economy. A variety of ups and downs exist when trading with other countries. For example, one of the major benefits to importing a good is that the time it would cost a business to produce that good could be spent producing another good that is more of a product per the time it takes to make (Mankiw, 2007). One of the major problems that governments run into is taxation; the taxes or tariffs that need to be placed on goods to help protect their countries own interest and production. If these such tariffs or taxes are not put into place then the trading that is done will ultimately not be regulated and can effect or even destroy one’s economy. In the simulation the team participated in, many interesting points were presented. The simulation gave a little insight to how the tariffs and taxes can work on importing goods. It was difficult to make some of the decisions that were needed about the importing and exporting of specific goods. It was interesting to see how the imposed tariff rates affected the outcome. Everyone chose something different. In the end when choosing FTA with both neighboring countries it said that it was a good choice though not without drawbacks. Effects of Government Policy on Economic Behavior The government uses two types of policies to regulate economic behavior: fiscal policy and monetary policy. Fiscal policy uses government spending and taxes to steer the economy in the right direction. Government spending increases the money being paid to workers, thus increasing their spending power. This can also create jobs and increase the overall GDP of our country by inserting more money into the hands of consumers. Taxes help to regulate the economy by providing an income for the government; allowing the government to return that income into other products bought from other companies. Monetary policy “controls the currency by adjusting the value of money to control inflation and adjusting it to stimulate growth” (Economic Policy, 2009). This mainly affects interest rates and inflation. Inflation can be tied together with fiscal policy as well, due to the effect government spending has on creating jobs, thus decreasing unemployment and raising inflation. Interest rates help to control the economy, but once spending increases, interest rates increase, investing decreases and cause an overall decrease in the GDP, and the economy as a whole. The World Trade Organization Located in Geneva, Switzerland, and established in 1995, the World Trade Organization (WTO) “is the only global organization dealing with the rules of trade between nations” (Lamy, 2009). Signed by the bulk of the world’s trading nations, the agreements made help the members within the WTO conduct their business through goods and services, imports, and exports. One trade topic identified on the WTO’s website is Interaction between Trade and Competition Policy. This is a relatively new issue in the WTO and this topic addresses how antitrust or competition laws interact with international trade. About one-third of these interactions took place with trading being done within companies themselves, usually subsidiaries trading between countries. During the Doha conference in 2001, it was decided that “the WTO would work towards unifying towards a common clarification of core principles, provisions on hardcore cartels, modalities for voluntary cooperation, and support for progressive reinforcement of competition institutions in developing countries” (Lamy, 2009). This program was disbanded with no further participation as of the Cancun conference in 2004. The WTO helps regulate and stimulate trade between countries and ensuring continuous benefits for trading within member countries. It tries to reduce the barriers from entering into trade with other member countries as well as provides a legal watchdog to keep fairness of trade in-tact. Through all that the team has learned regarding international trade and the pros and cons of this ‘business’, one key fact is evident; international trade has been a staple for our country and will continue to be a prime stimulus for our economy. With specific regulations and government monitoring, a countries economy should benefit from international trade and maintain open relations with neighboring countries. Stabilization of the economy may be questionable at times; however, ups and downs are a necessary part of the business cycle and the climb to the next peak will provide lessons learned and a stronger economy. References Economic policy. (2009, March 6). In Wikipedia, The Free Encyclopedia. Retrieved March 11, 2009, from http://en.wikipedia.org/w/index.php'title=Economic_policy&oldid=275498427 Lamy, P. World Trade Organization. Retrieved March 10, 2009, from www.wto.org. Mankiw, N. (2007). Principles of Economics (4th ed.). Mason, OH: Thomson South-Western Van Bergen, Jason. (2009). Forces behind exchange rates. Retrieved March 9, 2009 from http://www.investopedia.com/articles/basics/04/050704.asp