International Economics

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International Economics

Production of Wine Between the United States and Italy

International Economics代写 A country, individual or an entity that has comparative advantage use lower cost to produce a product or service···

 

Absolute Advantage Versus Comparative Advantage

Absolute Advantage

When a country, individual, or a company can produce goods and services at the relatively lower cost per unit than another country, individual, or a company that produces similar goods or services (Schumacher, 2012). In other words, a country, individual or an entity that has comparative advantage use lower cost to produce a product or service, and the method of production is efficient than any other entity dealing with the same line of product or services.

Absolute advantage is a theory in the international trade which is used to compare two or more countries about their imports and exports, methods of production, and efficiency in production. In comparison, those countries with absolute advantage are more specialized in the specific field in production. When a country becomes a specialty in a particular field, it becomes more efficient in the method of production thus producing them at a lower cost thus generating higher revenues in the export market.

International Economics代写
International Economics代写

The country with absolute advantage then produces the product for the countries without absolute advantage. They use the return from the product to import other products which it does not produce. Adam Smith developed this idea of absolute advantage in the 18th century in his discussion of the division of labor.

In this case, the United States produces 1000 million gallons of wines per year while France only produces 100 million gallons each year. The United States has an absolute advantage going by the amount of wine produced per year in comparison with Italy.

Comparative Advantage  International Economics代写

A country is said to have a comparative advantage when it can produce goods a lower opportunity relative to the other country (Laursen, 2015). The country with lower opportunity cost, forgo less in the production of other goods in order to produce it. For instance, if the United State is producing textile and books together with Italy as below:

  Textile Books
United States 2 5
Italy 3 4
Total 5 9

The two countries produce textile and books. For the US to produce two units of textile, it has to forego the cost of 5 books. The case applies to Italy where the opportunity cost is 1.3. In this case, therefore, Italy has a comparative advantage in producing textile as compared with the US.

On the other hand, the opportunity cost of producing a book in the US is 0.4 while that of Italy is 0.75. The comparison in the opportunity cost for the production of the book means the US has a comparative advantage than Italy.

In the economic terms comparative advantage means that even if the US has the comparative advantage in the production of all goods than Italy, they will still trade with each other. A country import those good that their opportunity cost for importation is lower than the cost of production locally. This way, for instance, US comparative advantage in the production of wines will result in specialization thus more efficient allocation of resources. The same case applies to Italy.

The Conditions Under Which Two Countries Can Mutually Benefit from Trading With Each Other  International Economics代写

Both the US and Italy differ in their ability to produce textile and books. That is their opportunity cost of production is different thus leading to specialization. As such, the differences in the opportunity cost between US and Italy is the evidence of that; there will be trade between the two countries and which will be mutually beneficial. The US will specialize in the production of books while Italy specializes in the production of textile. Therefore, because it is not efficient to produce both at the same time in the same countries, the US will import textile from Italy and Italy will export books to the US.

The trade between the two countries will aim at attaining the market equilibrium. In this case, the terms of trade are introduced. In another word, US will trade domestic products for the imported product from the US. As such, mutual trading leads to specialization in production. The US will specialize in books which it has the comparative advantage on while Italy will specialize in textile which it also has a comparative advantage in. Further, the trade within the exchange of what each of them does not produce thus resulting in mutual benefit in trading.

Terms of Trade and How it Determine the Extend to Which Each Country Specializes  International Economics代写

Assuming that both the US and Italy do not trade before then, they start trading. As long as there exists an opportunity cost between the two countries, it is a clear indication that there will be advantageous trade between them (Feenstra, Mandel, Reinsdorf, & Slaughter, 2013). The relationship that will be established due to the differences in opportunities costs will result in specialization in both countries. As such the specialization is a clear reflection of the comparative advantage between in the two countries.

Before the transaction between the two countries, the US could exchange two units of textile for five books while Italy could exchange three units of textile for four books. Once the trade begins, the US will export books to Italy for textile. On the other hand, Italy will export textile for books from the US. This way the US will gain 0.4 of textile from Italy at the same time Italy will gain 0.75 of the books from the US. As a result, the terms of trade will be established where each of the countries will trade the domestic product for import from the other countries thus establishing equilibrium between the two countries.

Additionally, the terms of trade will be 0.4 of textile from Italy in exchange for 0.75 of books from the US.  International Economics代写

The two will, therefore, exchange the opportunity costs for textile and books in the trade. Thus, Italy will rush to produce more textile and fewer books as the US also reduce the production of textile and increase that of books until they reach their possibility frontier at which point the terms of trade will equal the opportunity costs.

These phenomena will result in the US specializing in the production of books while Italy specializes in the production of textile. This way the resources used to produce textile in the US will be used to produce books; the similar case will apply to the textile producer until the productivity frontier is adjusted to the optimum. In the long run, each of the countries will be producing at their comparative advantage (Dean, Lovely, & Mora, 2017).

The Mutual Benefits of Trade  International Economics代写

Where there is free trade there is comparative cost. A country gain more when it trades with other countries rather than producing all the products on its own (King, 2013). Therefore, countries with various capabilities come together to trade in mutual benefits.

Table: The mutual benefit of trade

  US Italy
Production Consumption Production Consumption
BT AT BT AT BT AT BT AT
Textile 4000 7000 4000 4500 4750 3000 4750 5500
Books 9000 7000 9000 9500 2000 6000 2000 3500

When trade starts the Italy factors of production shift to the production of books where it has a comparative advantage, as a result, the production of books triples from 2000 to 6000 books per year. Italy then exports 2500 of the books to the US to remain with 3500 books every year. Therefore, it reduces the production of textile to 300 per year and receives 2500 more from the US as well. Italy is left with 5500. In essence, Italy began the following year with 1500 more books and 750 textiles than it had before it began the trade.

On the other hand, US trade with textile for books. Its production remains at point B. after consuming a combination of C; it gains more of both products than at point A, the solution to before trade. Italy’s production remains at B’ but consume at point C’ at which point it has more of textile than books than it had before the trade.

The international trade allows countries to consume more than they can be able to produce. This way, the countries end at C and C’ which are outside the productivity frontier but still produce at the possibility curve.

One-way Trade and Two-way Trade  International Economics代写

One-way trade occurs when US and Italy are specializing in the areas, they have a comparative advantage (Baier, Bergstrand, & Feng, 2014). The US exports the product it specializes in and imports the product which it does not produce from Italy. The same case applies to Italy when it specializes in the production of textile but import books from the US.

However, there are instances when the US and Italy can be importing and exporting the same goods in the same industry. When this occurs, the US will export books Italy and import the same from Italy. The reverse will also happen. Another example is when US import cars such as Toyota from Japan and export cars like Chevrolet and ford to Japan. Similarly, Japan will export cars to the US and import cars from the US as well. This type of trade is called two-way trade.

Why Two-way Trade Occur  International Economics代写

It is important to note that, two-way trade occurs when the countries exchange products in the same industry. The reason for two-way trade can be as a result of variation in costs of transportation and seasons. For instance, the US and Canada transactions where they trade in construction materials are solely dependent on the cost of transportation. In essence, it is more comfortable for a person at northern Maine to import from eastern Canada than to buy from the US.

Another approach to the reason why two-way trade exists in the production of goods in the same industry does not occur in similar condition in the perfect competition market. This assumption is used to explain the two-way trade using product differentiation in monopolistic competition and oligopoly (Neary, 2016). For instance, assuming that two countries have the same endowment of resources and technologies, but their product is differentiated.

An excellent example of this is when a clock is manufactured by different companies internationally. A clock manufactured in the United States can be consumed in Italy and clocks from Italy be consumed in the US. The two countries are well endowed with the resources and the manufacturing technologies, but they end up trading together in the same product. As such the two way trade with differentiated products thus becomes more significant than one-way trade based on the comparative advantage.

Protectionist Policy and Its Impact  International Economics代写

Protectionism is an emerging policy in the modern economy which has elicited numerous critics and likes in equal measure. The tactic is used majorly used by the policymakers and government with the aim of enhancing the well-being of the country (Marette, & Beghin, 2017). Protectionist is a tactic through which the country can recover from the economic downturn — however, not all the time that the tactic of protectionism work for the best interest of the locals as well as the trade partners.

At times the country can suffer an economic setback like recession or depression. It is therefore essential to understand why protectionism is enacted as well as its effects to the county’s economy. In the context, the case in this paper, protectionist occurs when the US or Italian government want to protect its local companies and employees from foreign influences.

Protectionist policy means that a country enacts restrictions which control the importation of the foreign goods and services.  International Economics代写

The policymakers put the trade barriers to protect the economy from international trading. International trade comes with products which might be produced locally, and that might be cheaper than the locally manufactured.  Therefore, when these products meet in the market with local products which might be of higher quality but highly priced, the consumers may tend to have a preference of the imported cheap products, thus hurting the local manufacturing companies. Additionally, international trading might introduce lower value products which the government may not approve hence putting some restrictions on the types of product to avail in the market is essential.

Protectionism is the opposite of free trade.

In free trade, the government the government interference, restrictions, and barriers are put at the minimum (Lake, 2018). Therefore, the citizens are allowed to purchase good and services from any country of their choice as well as sell to any market of their choice. While protectionism seeks to protect the national economic interest, free trade seeks to encourage a higher level of domestic consumption of products and to create efficiency in the utilization of resources (Marette, & Beghin, 2017). Additionally, free trade stimulates economic growth and wealth creation of the trading partners.

Impact of trade protectionism  International Economics代写

Despite the policy having the good intention of protecting the local industries, protectionism has long-term macroeconomic effects on the country.

i.

Limited consumer choice: Trade restriction results in limited importation of products into the local market. The local industries may fail to offer a variety of products to the market. As a result, consumers lack variety. Moreover, due to lack of competition the industries may end up overpricing their product by acting like monopolies or creating artificial demands which increase the product prices.

ii.

The possibility of overprotection leading to stagnant manufacturing industry: When industries become protected, they tend to relax due to lack of technological, resources, and market competition. Consequently, they end up being remaining stagnant on their growth.

iii.

When the government engages in exchange rate controls, in the long run, there might be a problem of inflation. This happens because the domestic nation may keep their currency low to create demand for their products relative to other products in the foreign market. As such, foreign products become expensive in the local market.

iv.

The policy also leads to trade wars among the nations. The wars are as a result of nations reciprocating the trade practices of a particular country. The trade wars, as a result, hurt the global economy where the products produced have low access to the international markets.

Various Forms of Protection Policy  International Economics代写

For protectionism to occur, it takes various forms which the government might impose to protect its interest in the economy (Low, 2016).

i. Tariffs:

These are taxation on imported goods and service from foreign markets. The government aim of tariffs is to reduce the number of imports into the local market as a way of protecting the local manufacturing industry. The application of tariffs various with the sector the government intend to protect, that is, it can impose high tariffs on those good it feels should be produced locally or lower tariffs for the goods that not manufactured locally.

ii. Quotas:

These a directed restrictions or regulations of specific goods or services, that that the government may permit their entry into the local market. The enactment is done by authorizing specific groups to the importation of specific products. There are also export quotas which restrict the exportation of the local products to the international markets.

iii. Subsidies:

These are the government funds to the local manufacturers who aim to reduce the cost of the product as well as encourage production of a specific product. The government subsidies come in various forms such as cash, low interest on loans, tax exemptions, and government interest in the company.

iv. Local content requirement:

This aspect requires that, for every import, there is a local contribution. In other words, in the product manufacturing, for it to be allowed, the company need to have local interests in the product.

v. Administrative trade policies:

The government may impose bureaucratic rules, laws, and regulations which make it difficult for import to enter the goods to the local market. Formally, this protectionism comes in the rules and regulations, requirements, and paperwork. Informally, it comes in the forms of inspections.

vi. Exchange rates control:

The approach uses the mechanic of lowering the prices of the locally produced products in the international market which will result to increase in the prices of the imports thus discouraging the local market of the imports.

Discussion and Assessment to Justify Trade Restrictions  International Economics代写

A country that takes the route of trade restrictions, it does so for various reasons. In other words, the government terms them as interventions (Kerr, Smyth, Phillips, & Phillipson, 2014). They include:

i. Protecting jobs and industries:

This is a political argument in support of trade restriction. The approach aims to protect the lives of workers as well as the industries that employ them. It is premised on that; when these industries are not protected from international trade forces, they may end closing down. Thus the country loses the locally produced products and more to that, the loss of employment.

ii. National security:

International trade also involve defense-related products, technologies, and foods. Therefore it is essential for the government to keep the importation of these products in check so that no defective, dangerous, or harmful product is made sold in the local market. Some industries like aerospace, electronics, and semiconductors are essential to national security. Therefore, reliance on imports become risky to the security of the country — the trade protection aim at having such products produced locally.

iii. Consumer protection:

The policymakers may use this argument to protect consumers from unsafe imports. Further, the argument is that the foreign product may not be up to the standards required by the local market. If their trade restriction is not present, the entry of such products harmful to the users may access the market.

iv. To protect the infant industries:

The policy statement that, when the infant industry compete at the same level with established companies, it becomes difficult for them to compete and be profitable at the same time. This is because the infant industries may lack the economic and financial resources, as well as the required technologies, compared the most established companies. As such, for the infant countries to be competitive and establish themselves in the market, the policy makers and the government put such mechanism to protect them.

International Economics代写
International Economics代写

References 

Baier, S. L., Bergstrand, J. H., & Feng, M. (2014). Economic integration agreements and the margins of international trade. Journal of International Economics, 93(2), 339-350.

Neary, J. P. (2016). International trade in general oligopolistic equilibrium. Review of International Economics, 24(4), 669-698.

Marette, S., & Beghin, J. (2017). Are standards always protectionist?. In Nontariff Measures and International Trade (pp. 179-192).

Lake, D. A. (2018). Power, protection, and free trade: International sources of US commercial strategy, 1887–1939. Cornell University Press.

Kerr, W. A., Smyth, S. J., Phillips, P. W., & Phillipson, M. (2014). Conflicting Rules for the International Trade of GM Products: Does International Law Provide a Solution?.

King, K. (2013). China’s Aid and Soft Power in Africa. James Currey.

Feenstra, R. C., Mandel, B. R., Reinsdorf, M. B., & Slaughter, M. J. (2013). Effects of terms of trade gains and tariff changes on the measurement of US productivity growth. American Economic Journal: Economic Policy, 5(1), 59-93.

Beckmann, M., Hielscher, S., & Pies, I. (2014). Commitment strategies for sustainability: how business firms can transform trade‐offs into win–win outcomes. Business Strategy and the Environment, 23(1), 18-37.

Low, P. (2016). International trade and the environment. UNISIA, (30), 95-99.

Laursen, K. (2015). Revealed comparative advantage and the alternatives as measures of international specialization. Eurasian Business Review, 5(1), 99-115.

Schumacher, R. (2012). Adam Smith’s theory of absolute advantage and the use of doxography in the history of economics. Erasmus Journal for Philosophy and Economics, 5(2), 54-80.

 

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