International Trade, Comparative Advantage and Protectionism

Group D INTERNATIONAL TRADE, COMPARATIVE ADVANTAGE AND PROTECTIONISM 1. According to the table above determine which country has the absolute advantage in corn and which in soybeans. In addition, determine which country has the comparative advantage in corn and which in soybeans. Make sure to support your answer by deriving the opportunity costs of each. Ans. A producer with absolute advantage over the other in the production of a good or service is if it can produce that product using fewer resources. Therefore; Canada has absolute advantage in Corn and Mexico in Soybean.

Comparative advantage is the producer with the lowest opportunity cost. Opportunity cost is the cost of an alternative that must be forgone in order to pursue a certain action or the benefits you could have received by taking an alternative action. For example, the opportunity cost of going to college is the money you would have earned if you worked instead. On the one hand, you lose four years of salary while getting your degree; on the other hand, you hope to earn more during your career, thanks to your education, to offset the lost wages. Canada O/C for corn 8/2 = 4 soybeans

Canada O/C for Soybean8/2 = 0. 25 Corns Mexico O/C for corn2/10 = 0. 2 Soybeans Mexico O/C for Soybean10/2 = 5 Corns Canada has comparative advantage in soybean and Mexico has comparative advantage in corn. 2. According to the table above, would there be trade flows in both directions if the exchange rate were $1 = 1 peso? Ans. The USA would gain by exporting plastic and importing pesos from Mexico. At an exchange rate of 1:1, it now only has to give up $1 worth of plastic to obtain 1 pesos, whereas before trade it had to give up $4 for 8 pesos.

On the other hand the USA would not benefit from trade on paper because at the inception USA was getting a good rate on paper at $1 to 3 pesos. 3. If a lower exchange rate spurs exports then why wouldn’t it be a good idea of policymakers to intervene to push the exchange rate as low as they can? Ans. It is not a good idea for policy makers to intervene to push the exchange rate as low as they can because importers sometimes would not benefit or get value for their money. The exchange rate would also affect the quantity of goods received. . What is protection as it refers to international trade? Ans. Protectionism is restraining trade between countries through methods such as tariffs through imported goods, restrictive quotas, and a variety of other government regulations designed to allow fair competition between imports and goods and services produced domestically. 5. Explain the law of comparative advantage and why it is important in international trade? Ans. The concept of comparative advantage is an integral part in achieving increased gains in international trade.

The concept, first introduced by David Ricardo in 1817 states comparative advantage exist when a country has a “margin of superiority” in the production of a good or service, where the marginal cost of production is lower. He explained how trade can benefit all parties such as individuals, companies, and countries involved, as long as goods are produced with different relative costs. The net benefits from such activity are called gains from trade. This is one of the most important concepts in international trade.

According to the principles, benefits of trade are dependent on the opportunity cost of production. Opportunity cost is measured in terms of what you give up of another other. A country with no absolute advantage in any product, i. e. the country is not the most competent producer for any goods, can still be benefited from focusing on export of goods for which it has the least opportunity cost of production. When countries specialize and trade based on comparative advantage consumers pay less and consume more and resources are used more efficiently.

Countries which are open to trade grow faster over the long run that those that remain closed. Increased trade benefits consumers and producers, through lower prices and access to a wider variety of goods. This is due to specialization which lowers cost and competition. Trade helps countries in allocating resources as efficiently as possible; it also allows countries to accumulate resources more quickly. 6. Distinguish between a tariff and quota? Explain the effect of tariff/quota on domestic consumption, prices and output. Ans. Tariffs and quotas are tools implemented to protect domestic industries.

To distinguish between both we need to explain what a tariff and a quota is. A tariff is a tax or duty placed on imported goods by a domestic government and does not apply to sales of domestically produced goods and a quota is a limit on the quantity of imported products. Base on the explanations above we can note that tariff is imposed to make goods imported from foreign countries more expensive as it raises the price of an imported good, making it more expensive than similar domestic goods which protects domestic producers from dumping by foreign countries.

As outlines on businessdictionary. com ‘dumping is exporting goods at prices lower than the home market prices’. The rational is to increase demand for domestic products while reducing the quantity of imports. Tariffs are a benefit to domestic producers who faces reduced competition in their home market. The reduced competition causes prices to rise. Sales of domestic producers should also rise, all else being equal. With the increase in production and prices this will cause increase employment and a rise in consumer spending.

The tariffs also increase government revenues that can be used to the benefit of the economy. Once the price of the good with the tariff has increased; the consumer is forced to either buy less or of some other good. The price increase will cause a reduction in consumer income. A quota sets a limit on the quantity of goods that can be imported during a particular period. Quotas are employed to protect new industries and keep market entry costs low for domestic producers. They also protect domestic jobs by ensuring that foreign products are not imported in sufficient numbers to meet current demand.

This will ensures a percentage of the existing market share is retained by domestic companies. Once there is an increase in imports quotas are more protective than tariffs. Quotas benefit the government by protecting domestic corporations to keep people employed. 7. “Economists have demonstrated that imports benefits consumers while causing losses to producers and exports benefit producers while causing losses to consumers. In the balance then international trade neither benefits nor hurts a nations as a whole. ” Evaluate this statement. Ans.

International trade is the exchange of capital, goods, and services across international borders territories. The international trade accounts for a good part of a country’s gross domestic product. It is also one of important sources of revenue for a developing country. The trade which exists between countries consists of buying goods that are produced at a lower cost elsewhere. Individual and countries have different abilities in producing their goods; taking the advantage of these differences in order to have efficiency will enable each to experience gains from trade. . If the Bank of Jamaica suddenly switches to a more expansionary policy, explain the effects it will have on the exchange rate and balance of payments of Jamaica. According to investopedia (2012),an expansionary policy is a macroeconomic policy that seeks to expand the money supply to encourage economic growth or combat inflation (price increases). One form of expansionary policy is fiscal policy, which comes in the form of tax cuts, rebates and increased government spending.

Expansionary policies can also come from central banks, which focus on increasing the money supply in the economy. The bank of Jamaica cab increase money supply in two ways. These are; * By reducing the policy interest rate * Open Market Operations due to the purchase of certificate of deposits Reducing the policy interest rate and Impact A reduction in the interest rates will result in Commercial banks and other Deposit taking institution extending more funds to individuals and businesses.

In other words the increased ability to borrow funds due to a reduction in policy interest rates will cause more Jamaica dollars to be in circulation. The excess supply of money will result in pressure on the Jamaican dollar resulting in a depreciation of the Jamaican dollar. The pressure that is exerted on the Jamaica dollar due to an expansionary policy will cause a widening of the balance of payment deficit. The Jamaica economy is heavily dependent on imports and therefore it would cost more to import product and services ******