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International Trade Essay

1845 words - 8 pages

International Trade Simulation and Report
Krystil Hargiss, Sheila Zablocki, Casey Powell, Heather Reed
Economics 212
Johnny Shull
March 8, 2010

International Trade Simulation and Report
Concept Summary results from four team members from the International Trade simulations were evaluated. Learned from the International Trade Simulation were advantages and limitations of International Trade. Four key points were emphasized in the simulation. Noted are influences affecting foreign exchange rates and issues surrounding International Trade. Explained are absolute and comparative advantage and what the World Trade Organization (WTO) is.
Advantages and Limitations of International ...view middle of the document...

Key Points Emphasized in the Simulation
The four key points emphasized in the International Trade simulation. First, comparative advantage is the basis for international trade. International Trade is the ability to better suit the production of one good than to the production of another good. Second, the Production Possibility Curve is curves measuring the maximum combination of outputs that can be obtain from a given number of inputs. Third, Increasing Marginal Opportunity Cost states that to arrive at more of something, one must surrender escalating quantities of something else. Fourth, the boundaries like regulatory trade restrictions, tariffs, and quotas limit sometimes put a stop to goods from trading between countries.
Define Absolute and Comparative Advantage
Mankiw states, “there are two ways to compare the ability of two people in producing a good” (Mankiw, 2007, p. 58). These two ways are called absolute advantage and comparative advantage. The following will define both terms and provide scenarios for both. Absolute advantage is defined by Mankiw as “the person who can produce the good with the smaller quantity of inputs” (Mankiw, 2007, p. 58). The following scenario will describe an example of absolute advantage. John Doe can produce five DVD players per hour with three employees. Jane Doe can produce 10 DVD players per hour with three employees. If John and Jane’s employees are paid the same, Jane’s employees have an absolute advantage over John’s employees in producing DVD players per hour. Jane’s employees can produce twice as many DVD players as John’s employees can. Mankiw describes comparative advantage as “the person who has the smaller opportunity cost of producing a good” (Mankiw, 2007, p. 58). The following scenario will describe an example of comparative advantage. In Kansas City John Doe is the best doctor and the best teacher. If John Doe is only going to be a doctor instead of practicing both occupations at once, employed as a doctor, both the output of the doctor and the teacher would increase, as it is more difficult to be a doctor than a teacher.
Influences Affecting Foreign Exchange Rates
Foreign exchange rates are determined by supply and demand for a specific currency. Several effects including foreign trade, economy, and the activities of investors influence supply and demand. Interest rates affect the exchange rates as well. Currencies are affected by changes or anticipated changes in interest rates and a country’s risk factors. At face value the exchange rate is predicted by a country’s imports and exports. If import payments exceed export earnings the currency will depreciate. Some other key issues that affect exchange rates include: Interest rate difference’s and the expected rate of inflation, trading of other currencies, international capital gains and losses, financial and political stability of the country, and the central banking system. ...

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