economics course work assignment1

7/27/2019 Economics Course Work Assignment1

1/7

Economics Course Work Assignment

The extent to which a countrys prosperity is dependent upon International Trade

Horace Davis ID #: 0410636

Auline Smith ID#: 0504147

Tariq Parchment ID #: 0701996

Tavar Smith ID#: 0500559

Craig Williamson ID#: 0703982

Economics, Semester 2

TUTOR: Miss S. Nelson

March 30, 2009

C3M


2/7

International trade has flourished over the years due to the many benefits it has offered to

different countries across the globe. When we talk about international trade we refer to

the movement of goods and services from one country to another. International trade

accounts for a good part of a countrys gross domestic product. It is

also one of important sources of revenue for a developing country.

With the help of modern production techniques, highly advanced transportation systems,

transnational corporations, outsourcing of manufacturing and services, and rapid

industrialization, the international trade system is growing and spreading very fast.

International trade among different countries is not a new a concept. History suggests that

in the past there were several instances of international trade. Traders used to transport

silk, and spices through the Silk Route in the 14th and 15th century. In the 1700s fast

sailing ships called Clippers, with special crew, used to transport tea from China, and

spices from Dutch East Indies to different European countries.

The economic, political, and social significance of international trade has been theorized

in the Industrial Age. The rise in the international trade is essential for the growth of

globalization. The restrictions to international trade would limit the nations to the

services and goods produced within its territories, and they would lose out on the

valuable revenue from the global trade.

The benefits of international trade have been the major drivers of growth for the last half

of the 20th century. Nations with strong international trade have become prosperous and

have the power to control the world economy. The global trade can become one of the


3/7

major contributors to the reduction of poverty.

David Ricardo, a classical economist, in his principle of comparative advantage

explained how trade can benefit all parties such as individuals, companies, and countries

involved in it, 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. The gains from trade due to comparative advantage can

also be illustrated graphically with production possibilities curves, as shown in the

diagram. There are two graphs shown, one for the United States and the other for Korea.

In both graphs the horizontal axis as the number of TV sets and the vertical axis has the

number of vials of vaccine produced.

Comparative Advantage

KoreaUnited States


4/7

The production possibilities curves show electronic goods production (TV sets) versus

pharmaceutical production (vaccines) in Korea and the United States. On the left,

Americans are better off with trade because the production possibilities curve shifts out

with trade; thus, with trade, Americans can reach a point like C rather than A. The gains

from trade due to comparative advantage are shown by the distance between the two

production possibilities curve..one with trade and the other without trade. On the right,

Koreans are also better off because there production possibilities curve shifts out; thus,

Koreans can reach point F, which is better than point D. To reach this outcome,

Americans specialize in producing at point B and Koreans specialize in producing at

point E.

Adam Smith, another classical economist, with the use of principle of absolute advantage

demonstrated that a country could benefit from trade, if it has the least absolute cost of

production of goods, i.e. per unit input yields a higher volume of output. Smith put forth

four specific reasons why a country could gain from trade: (1) mutual gains from

voluntary exchange of existing goods, (2) increased competition, (3) the division of

labour, and (4) better use of skills and resources and resources in different countries.

Mutual Gains from Voluntary Exchange of Existing Goods:

We can say that when two people voluntarily exchange existing goods, they mutually

gain, even when though there is no increase in the amount of goods in the economy.

People benefit from voluntary exchange by reaching a preferred combination of the

different goods than before trade. Adam Smith emphasized this mutual benefit and

argued that it applies just as well to people in different counties as to people in the same

country. But the gains from trade go beyond the benefits of exchanging existing goods as

trade can increase the amount of goods by making production more efficient.

Increased Competition:


5/7

International trade makes the home market more competitive as this lowers prices. By

restraining, either by high duties or by absolute prohibitions, the importation of such

goods from foreign countries as can be produced at home, the monopoly of the home

market is more or less secured to the domestic industry (Smith 1994). Adam Smiths

analysis of the competition effects of international trade applies very well to modern

times as there is evidence spurring on competition in many industries, from automobiles

to steel to telecommunications. Competition from abroad helped improve the quality and

reduce the price of cars in the United States. It also helped to reduce the price and

improve the quality of telephones and beef in Japan (Taylor 1998).

The Division of Labour:

Smith identified the division of labour as a key reason for trade. The division of labour

reduces costs since each worker can specialize and develop expertise in a certain area.

But the division of labour requires that the market for the good has to be large as there

will be less opportunity for division of labour in firms which have a small productive

output than one with a larger output.

Better Use of Skills and Resources in Different Countries:

This is where smith focuses on the differences between countries. Smith argued that

countries can gain from trade if they export things that they are good at producing and

import things that other countries are good at producing. For example, the United States

and Colombia can gain from trade if the United States produces wheat, which it can

produce more cheaply than Colombia, and Columbia produces coffee, which it can

produce more cheaply than the United States.

According to the principle of comparative advantage, benefits of trade are dependent on


6/7

the opportunity cost of production. The opportunity cost of production of goods is the

amount of production of one good reduced, to increase production of another good by

one unit. 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.

Benefits of International Trade can be reaped further, if there is a considerable decrease

in barriers to trade in agriculture and manufactured goods.


7/7

References

International trade brings prosperity-Company News-JIZHONG ENTERPRISE

www.gzjizhong.com/english/news_detail.asp?id=50&classid=4 - 26k - Cached

Similar pages

Taylor John .B. (1994), Economics 2nd

Edition
http://www.gzjizhong.com/english/news_detail.asp?id=50&classid=4http://www.gzjizhong.com/english/news_detail.asp?id=50&classid=4http://www.gzjizhong.com/english/news_detail.asp?id=50&classid=4http://www.gzjizhong.com/english/news_detail.asp?id=50&classid=4http://www.google.com.jm/search?q=cache:U2z8jAagtJwJ:www.gzjizhong.com/english/news_detail.asp%3Fid%3D50%26classid%3D4+international+trade+and+prosperity&cd=5&hl=en&ct=clnk&gl=jmhttp://www.google.com.jm/search?hl=en&q=related:www.gzjizhong.com/english/news_detail.asp%3Fid%3D50%26classid%3D4http://www.google.com.jm/search?hl=en&q=related:www.gzjizhong.com/english/news_detail.asp%3Fid%3D50%26classid%3D4http://www.google.com.jm/search?q=cache:U2z8jAagtJwJ:www.gzjizhong.com/english/news_detail.asp%3Fid%3D50%26classid%3D4+international+trade+and+prosperity&cd=5&hl=en&ct=clnk&gl=jmhttp://www.gzjizhong.com/english/news_detail.asp?id=50&classid=4

economics course work assignment1

Documents