Learning Team C
November 15, 2010
International trade is very important to a global economy. When countries can trade products and services that they produce with other nations without obstacles, it creates a robust economy for those exporting and importing their products and services. However, there has to be a balance between the nations to prevent protectionism, isolationism and high tariffs on imports, which can lead to trade wars. The debate over free trade and tariffs is a very complicated process as evident with the creation of the World Trade Organization (WTO). “The World Trade ...view middle of the document...
According to the simulation international trade has limitations as well. If a nation is not a member of the WTO and does not have a Free Trade Agreement with a trading nation, it is vulnerable to higher tariffs than other nations who do have free trade agreements. This creates a problem because the whole idea behind free trade is to limit the obstacles that would raise tariffs and restrictions. If a country imposes tariffs on another country, the country paying the high tariff is not gaining from the comparative advantage of its good or service. For example, if a nation was not a producer of a wheat and discovered it had the resources available to be a major contender on the global market in producing and exporting wheat, the nation would want to limit its import of wheat. Limiting the import of wheat could trigger a trade war. Therefore, finding the balance is very important in international trade for all participants to win.
ADVANTAGES OF COMPARATIVE AND ABSOLUTE
Comparative advantage is the ability of an individual, a firm, or a country to produce a good or service at a lower opportunity cost than competitors. It not only means producing the good cheaper than other countries; but to produce the good effectively without compromising quality and safety standards for the consumer. Comparative Advantage can arise from natural resource, availability, and relative efficiency of factors of production and state of technology. Comparative advantage can change over time. Therefore, each country should asses the evolution of how their goods are produced to determine if the country is developing comparative advantage in such products.
Absolute advantage is the ability of an individual, a firm, or a country to produce more of a good or service than competitors, using the same amount of resources. For example Taiwan developed an extraordinary edge in manufacturing electronic goods such as the LCD screen and export 90% of the consumption worldwide. Taiwan is also considered to have absolute advantage over any other country producing carbon fiber composite materials.
The concept summary results from the simulation are that countries tend to specialize in products which they have a comparative advantage. There are some gains for countries which maximize their comparative advantage. These gains range from more choices for consumers, bigger markets for producers to explore, and more favorable trade for those countries that exploit their comparative advantage. The countries that identify their comparative advantage then can participate in Free Trade Agreements or bilateral agreements with neighbor countries even though the agreement involves tariffs and quotas.
One key point mentioned in the reading assignment and emphasized in the simulation was the production possibilities frontier (PPF). "A production possibilities frontier (PPF) is a curve showing the maximum attainable combinations of two products that may be...