International_Trade_Simulation_Memo

International Trade Simulations Memo Team B Eco 212 March 24, 2010 Dr. Krissa Wrigley To: Dr. Krissa Wrigley From: Team B Date: March 24, 2010 Re: International Trade Concepts Simulation and Principles of Economics International Trade Simulation Memo International trade has advantages and disadvantages as seen in the International Trade Concepts simulation. The simulation teaches that each country needs to know whether their products have absolute or comparative advantages before they begin to export and import goods. Additionally, when trade occurs between countries it is essential that governments know how foreign exchange rates are influenced because this could affect their profits. After the simulation, Team B debated about how government decisions on immigration policies effects economic behavior. The team also chose one trade topic from the World Trade Organization (WTO) and described why it is valuable. Advantage and Limitation The largest advantage of international trade is wealth. When a country can produce a product in which they have the comparative advantage, it brings with it possible wealth. Tariffs can add limitations. In the end it raises the price that consumers pay and could wipe out any advantage the county had. Trade allows countries to access a larger variety of goods while boosting economies, but some times it costs them to do so. Absolute and Comparative Advantage The first part of the simulation taught about comparative and absolute advantages. To determine what country had a comparative advantage, it had to be understood that to have this type of advantage a county would have to produce a specific good at a lower cost than other countries. For example, if Suntize specialized and spent less in producing electronics than its neighboring countries, Suntize therefore had the comparative advantage. The simulation supports what Mankiw said on how, “International trade can raise living standards in all countries by allowing each country to specialize in producing those goods and services in which it has a comparative advantage” (Mankiw, p. 736). Influences Affecting Foreign Exchange Rates Many factors influence foreign exchange rates such as interest rates, economic stability, trade, and supply and demand (Lowery, 2010).These examples can aid in making a country’s currency weak or strong. If interest rates are high, then there is a larger payback on investments made at those higher levels. The U.S. has shown firsthand how a weakening economy can depreciate the American dollar. When a country’s goods are in demand, it tends to strengthen that countries currency thus influencing the exchange rates of goods. For example, when a country’s currency appreciates they spend less money when importing goods but if it depreciates they will spend more money, and the opposite is true for an exporter from that same country. As a result, Steve Tomlinson states, “the foreign exchange rate determines the price of doing business across boundaries” (Tomlinson, 2008). Summary of Simulation Effects of Government Policy on Economic Behavior Trade Topic Conclusion The simulation along with the discussions this week advanced the economic thinking process of the team. The simulation offered a taste of free trade and its possible advantages and limitations. Though at times it was frustrating,the simulation was able to teach a large amount of information using personal interaction. Without the simulation it would have been difficult to realize how important comparative advantage is to a county and how policy can change behavior. The managing source of International trade is the WTO, without this organization International Trade would become chaotic. References Cato Institute. (2010). Immigration. Retrieved from http://www.cato.org/immigration World Trade Organization . (2010). Unerstanding_ the WTO: Settling Disputes_. Retrieved from http://www.wto.org/english/thewto_e/whatis_e/tif_e/disp1_e.htm Tomlinson, S. (Producer). (2008). Open-Economy Macroeconomics: Basic Concepts 31.2-1. [Television series]. Mason, OH: South-Western . Lowery, A. (2010). What makes currencies strong or weak'. thisismoney.co.uk. Retrieved from http://www.thisismoney.co.uk/markets/article.html'in_article_id=429456&in_page_id=3