International_Trade_Simulation_and_Report

International Trade Simulation and Report Taruh Cravens, Melody Jones, Geneva George-Williams, Ruby Morgan, Nicole Southerland ECO/212 Blake Bennett International Trade Simulation and Report This paper is a team correlation on the knowledge gained from our course of study and how the concepts are applied, how international trade affects the U.S, economy, and addresses the four key factors from our weekly reading assignments that are shown in the stimulation. The simulation identified Rodamia’s bordering countries provide an opportunity for international trade and investments that could greatly benefit Rodamia. International trade with other countries would give consumers more choices in price and quality of goods. The domestic producers would increase production to meet market demands in other countries, producing more capital for investing in new avenues. The interaction of trade between the countries will make the countries more vibrant and wealthier. Limitations of international trade are placed in the form of tariffs, quotas, and regulations. These limitations offer protection in certain circumstances but can have negative if used to retaliate for reasons such as political differences (Colander, 2004). The simulation emphasized four key points from the team’s weekly reading assignments, including comparative advantage, the principle of increasing marginal opportunity, the protection possibility curve, and limitations on international trade. The following details the four key points. 1. Comparative advantage is the ability of one country to produce a good or service at the lower opportunity cost than a competing country (Hubbard & O’Brian, 2010). The simulation showed Rodamia produced cheese and DVDs with a lower opportunity cost than corn or watches therefore Rodamia should export cheese and DVDs and import corn and watches (University of Phoenix, 2010). 2. The principle of increasing marginal opportunity cost says to receive more of something and individual or country has to give up a constantly increasing amount of something else (Hubbard and O’Brian, 2010). Comparative advantage allows better efficiency of inputs and increased outputs than a country could accomplish alone. An example would be Rodamia produces more cheese and DVDs because resources formally used to produce corn and watches are Currently used to increase productivity of cheese and DVDs for export. 3. The production possibility curve is a curve used to measure the largest amount of outputs attainable by a certain number of inputs (Hubbard and O’Brian, 2010). Rodamia evaluates how much cheese and how many DVDs can be produced using the same resources using the production possibility curve. 4. Limitations on international trade such as tariffs, quotas, and regulations may prevent trading between countries (Hubbard and O’Brian, 2010). If Rodamia enacts tariffs on corn imported from Uthania, the return for Uthania may not be sufficient for comparative advantage therefore Uthania will sell their corn elsewhere. Trade restrictions in certain circumstances act as trade representatives to protect firms and individuals (Internationalecon.com, 2010). Absolute and Comparative Advantage. Each country can develop products as long as their environment and production conditions will allow benefits from a trade involving exports with imports. Absolute advantage shows the difference in measuring the labor productivity of the product that can be produced more efficiently with contrast of other products the country can produce using the same resources. Two methods can help in the rational of measuring each products produced. One way is using the number of units of output in one hour of labor or number of hours it takes to produce one unit of output. The product that produces at a better efficient level with less productivity cost is the product for trade. According to Pugel (2003), to weigh the better option for trade one would need to think “who has the absolute advantage for beneficial trade”' Comparative advantage has the power to analyze the opportunity cost given up for the production of one product to the other as long as both countries gain from a trade. In comparing the two commodities of corn and cheese, we were shown the comparison of the benefit by reducing production on cheese and the quantity change in a bushel of corn (University of Phoenix, 2004). While the two products can be produced in the same country, one had evidence that if compared value per unit and per hour of labor corn had the comparative advantage over cheese. Reducing the labor from producing cheese to enhance the labor in producing one more bushel of corn had a higher productivity level at a lower opportunity cost. According to Pugel (2003), a country will export goods that it can produce at a low opportunity cost and import goods that it would otherwise produce at a higher opportunity cost. Influences Affecting Exchange Rates. Exchange rate entails the expression of a countries currency in terms of another countries currency. Exchange rates are determined on the interactions of supply and demand (Hubbard & O'Brien, 2010). Applying the concepts of demand and supply in the use of production on products also represents the exchange rate for the diversified nations. Exported and imported goods might need to be obtained using purchasing power parity to have proper equivalency for purchasing each other’s products. Without exchange rates to alter the changing currencies, opportunity for high profits are involved. For profits to become efficient on trade exchange rates have to show current values of dollars for each country. Exchanging the value represented at the time of domestic dollars with foreign dollar values. The higher domestic demand for foreign currency puts an increase against the dollar. The demand and supply potentially will influence the exchange rates affecting domestic and foreign dollars in short-term as well as long-term values. Pegging results in maintaining exchange rate steady because of governments buying its own currency increasing the demand at the desired exchange rate. Floating exchange rates continues to track the rising and lowering of a nation’s currency along with the world demand for that currency. Therefore, governments should only intervene when evaluation of the exchange rate is fluctuating beyond or under the value of the dollar. Determinants in long run exchange rates preserve the rise and lowering of rates. A fixed exchange rate will distress supply and demand which could cause surplus or a shortage in the economy. Debating the Issues. The team debated issues in regard to international trade including free trade versus restricted trade, how trade affects the value of currency, and labor practices. The majority of the team supported free trade over restricted trade but thought levying tariffs, quotas, or other regulatory actions can be beneficial in certain cases to prevent dumping (further discussion in World Trade Organization section).Labor concerns were also raised especially in regard to child labor and immigrant labor in n a number of countries including the U.S. Concept Summary. The concept summary emphasizes the fact international trade is based on comparative advantage because countries benefit by maximizing their natural resources and specialized products by trading with other countries for their natural resources, goods, and services thereby allowing each country to benefit from existing resources. Although the debate of free trade versus trade restrictions is ongoing, in terms of the best interest for all, free trade is preferred. Government Policy and Economic Behavior. Government policies have a direct effect on production and employment, which can be positive or negative. The fiscal policies are based on the GDP that has a direct effect on the business cycle. Currently the business cycle is in a recessionary trough with high unemployment and expansionary policies such as lowering interest rates are being implemented in order to raise the demand for products and decrease unemployment. World Trade Organization. A forum where governments can discuss trade issues, and a place where member governments go to sort out trade problems they have with each other, is called World Trade Organization (WTO). According to WTO “World trade organization deals with the rules of trade between nations at a global or near-global level (Organization, 2010). “It is an organization for liberalizing trade, and it is a place for them to settle trade disputes. Anti-dumping is trade topic the team found interesting. If a company exports a product at a lower price than it normally charges on its own home market, it is said to be “dumping” the product. Some countries find dumping an unfair competition, in response WTO has an anti-dumping agreement. Certain individuals and firms do not see dumping as unfair, but see it as an opportunity. The product may not sell in one country buy may sell in another. World Trade Organization is an excellent website for business or individuals needing information about imports and exports. The simulation served its purpose well, each member of the team now has a better understanding of international trade concepts, the operative processes, the benefits, and the liabilities. International trade can increase the prosperity of the countries involved financially and culturally as developed countries share knowledge and technological products to less developed countries in exchange for unique products and resources. References Colander, D.C. (2004). Macroeconomics. [5th ed.]. Irwin/McGraw Hill: Burr Ridge, IL. Hubbard, R., & O'Brian, A. (2010). Economics (3rd ed.). Boston, MA: Pearson Hall. Organization, W. T. (2010). What is the World Trade Organization. Retrieved 08 10, 2010, from WTO.org: http://www.wto.org/english/thewto_e/whatis_e/tif_e/fact1_e.htm Pugel, T. A. (2003). International Economics (12th ed.). New York, NY: McGraw-Hill. The International Economics Study Center. (2010). Retrieved from http://internationalecon.com