Applying International Trade Concepts During the 20th century the globalization movement, which gain momentum after the end of World War II, increased the volume of international trade among the countries participating in our global economy. International trade allows nations to sell its surplus production to other countries in the form of exports. It also enables a nation to acquire goods and services from other countries which is referred to as imports. This paper discusses international trade concepts based on the knowledge acquired in the classroom and from the simulation Applying International Trade Concepts.
There are lots of advantages associated with international trade. As a governmental official responsible for international trade matters in the nation of Rodomia I learned that international trade can lower the cost of living of a population through the acquisition of cheap goods. Rodomia had weaknesses in its production capacity of electronic goods. When the president decided to open up the economy of Rodomia and began trading with neighboring countries it found suitable suppliers to acquire the types of goods the citizens desired. The consumer had greater choice and accessibility to quality merchandise.
In order to succeed in the international trade scene it is imperative to exploit comparative advantages. Some of the cons of international trade include the possibility of other nations utilizing unethical tactics such as dumping merchandise. This is a strategy that overflows the market with cheap imports of a specific product in order to destroy the domestic industry. The goods are sold at below market value, thus there is not way the domestic producers can compete. When these types of actions occurred the government must intervene and fix the situation either by utilizing tariffs or quota mechanisms. The United States has the biggest and most sophisticated economy in the world.
Due to the consumerism tendencies of its population the US has been importing beyond their reach for decades. The United States has the largest trade deficit in the world. In order to remain competitive in the global marketplace after other nation began to take business away from US enterprises in many labor intensive industries the US emphasize in technology to improve its production capabilities. The economy also transformed itself into a knowledge economy attract foreign investment due to the large supply of skilled laborers such as engineers, accountants, and scientist.
The United States has been at the forefront of exporting expertise services such as engineering and project management contracts. A similarity between the US economy and Rodomia’s economy is that both nations depend on the production of the service industry as a major contributor of its gross domestic product. The United States has taken advantage of cheap imports in the early stages of the supply chain of companies in order to lower the overall costs of its own production.
The fiscal and monetary policy decisions of a nation can have a direct impact in the exchange rate of a currency. For example if the federal reserve of a nation decides to overflow the market with too much money then the value of the currency will go down. An extreme case of this scenario is the hyperinflation occurrence in Zimbabwe. Recently the government of Zimbabwe issued trillion dollar bills. When a nation overflows its market with too much currency in the global scene the exchange rate for that currency is going to be lower.
The exchange rate of a country’s currency has implication in international trade. If a currency devaluates the host nation loses purchasing power which implies that their purchases become more expensive (Varian, 2003). Four key concepts that I learned in the classroom which were applied during the simulation are production opportunity frontier, opportunity costs, international trade agreements, and tariffs applications. The production opportunity frontier was seen during the first round of the simulation. The objective is to find the right mix of imports and exports among the trade partners based on exploiting comparative advantages taking into consideration opportunity costs.
Opportunity cost is the value of the next best choice that one gives up when making a decision (Netmba, 2009). In the simulation I learned that the proper situation in which tariffs should be utilized by a nation. The two main reasons that tariffs are implemented are to protect a local infant industry or to counterattack against illicit strategies such as price dumping.
Of course tariffs also represent an revenue stream for governmental institutions. The creation of trade agreements which can be bilateral or multilateral are positive occurrences for international trade activity due to the elimination of trade barriers. Other advantages of trade agreements include: Higher volume of trade Producers can explore different markets Consumers get better range of products Increase demand and achievement of economies of scale Opens up new avenues for investment Employment increases in country receiving investment capital (Applying International Trade Concepts Simulation, 2009). The concepts learned in this simulation have many applications in the workplace. As a manager of firm one must look for international expansion opportunities.
In order to create subsidiary in foreign soil it is important to find location that accept the investing without imposing too many unreasonable requirements. The existence of trade agreements can allow a company to gain easy access into a foreign nation. A company can exploit cheap import opportunities by acquiring raw materials or through outsourcing contracts. International trade provides a marketplace for firms to sell their products to other nations in the form of exports. The key attribute the economy in which a company is location must have is that the economy must be open.
China is the best example of a country that has become a prototype of economic which was only possible after the elimination of the close economy of the past. China gain entrance into the World Trade Organization (WTO) in 2001, afterwards the economy of this nation became fully open. The simulation taught me a lot of things. I learned the importance analyzing the attributes of a country which determines which products the nation should produced.
A country should enter into trade activity with partners that can provide them the best deal which is determine by the opportunity costs of producing a particular good in each nation. Despite the important of free trade there are situation which mandate the utilization of protectionism. In the United States for example alternative energy products represents an industry in the birth stage. President Obama should protect this industry through tariffs or quota tools. The reason for doing is that infant industry represents future job creation for a nation which means the president would be making decisions considering the long term.
The creation of free trade agreement is more feasible between regional partners. The NAFTA agreement and the European Union are two examples. The organization that is at the forefront of international trade across the world is the WTO. In the future among WTO partners a platform should be created for a free trade agreement of greater magnitude that includes players from each of the seven continents. References Applying International Trade Concepts Simulation (20009). University of Phoenix. Retrieved March 19, 2009 from rEsource database.
Netmba. com (2009). Opportunity Costs. Retrieved March 22, 2009 from http: //www. netmba. com/econ/micro/cost/opportunity/ Varian, H. (2003). Intermediate Economics: A Modern Approach (6th ed. ). London: W.W. Norton & Company.