The purpose of this paper is to summarize the International Trade Simulation, explain the basic concept of International Trade, emphasize the four key points from the reading assignments in the simulation, and apply these concepts to my workplace. Simulation Summary In the International Trade simulation, you are the Trade Representative of a small country called Rodamia. You are introduced to international trade–the theory of comparative advantage and the impact of tariffs, quotas, and dumping on international trade (Applying International Trade Concepts, 2003).
In the first segment, it is your job to evaluate what products to produce within the country and what products to import based on the Production Possibility Frontier (PPF). Due to comparative advantage, Rodamia should export cheese and DVD players, and import corn and watches. The incentives to export were determined from the Trade Commission Report and the Production Possibility Frontier that both showed the opportunity costs for each country’s production. In the second segment, you make decisions pertaining to tariffs and quotas.
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Because the dumping margin could be an ongoing anomaly, Rodamia should impose an anti-dumping tariff at $40 a unit, or 25% of export price. The Trade Commission reports indicate that a tariff will lower imports and increase domestic supply. The government gains revenue to offset any loss in consumer surplus. No trade restrictions should be imposed on imported corn. The Trade Commission weighed the magnitude of damage a tariff would cause and it was determined that imposing a tariff would increase the price of corn (Applying International Trade Concepts, 2003).
This would cause a loss in consumer surplus, which is deadweight to the economy. Last of all, the simulation also introduces free trade agreements. Free Trade Agreements should be made with both Uthania and Alfazia. The country profiles showed restrictions in trade that were also limiting opportunities for Rodamia. Free Trade Agreement’s will increase the volume of trade and enable a flow of investment between countries (Applying International Trade Concepts, 2003). Basic Concept of International Trade According to Colander, “The reason two countries trade is that trade can make both countries better off” (2004, p. 16). In economics, the theory of comparative advantage clarifies why it can be advantageous for two countries to trade, even though one of them may be able to produce every kind of item more cheaply than the other. What matters is not the absolute cost of production, but instead, the ratio between how easily the two countries can produce different kinds of goods. The basic idea of the principle of comparative advantage is that as long as the relative opportunity costs of producing goods differ among countries, then there are potential gains from trade.
International trade affects the economy by increasing the Aggregate Demand (AD), and by becoming a source of inputs for production. International trade based on the theory of comparative advantage will improve efficiency in allocating resources, as well as allow businesses to reach economies of scale – “the situation in which costs per unit of output fall as output increases”, consequently reaching competitive prices of international markets (Colander, 2004, p. 428).
When an economy involves itself in trade, under the right circumstances, it is able to shift the Production Possibility Curve (PPC) curve outward, and achieve greater levels of output. This increase in production can be achieved through the use of more resources and by utilizing resources of labor, capital and land more efficiently. Also known as economic growth, this increase in production signifies economic development as well. Despite its negative effects, international trade can greatly improve the standard of life for many people.
International trade boasts several advantages, through more choices to the consumer, bigger markets for producers to explore, and a more favorable balance of trade. However, while limitations on international trade, such as tariffs and quotas, voluntary restraint agreements, embargos, regulatory trade restrictions, and nationalistic appeals can offer protection in some situations and can be beneficial, they can become harmful to both parties if these tools are used in retaliation (Colander, 2004).
Key Points from the Reading Assignments Emphasized in the Simulation There are four key points emphasized in the International Trade simulation. First of all, having a comparative advantage is the basis for international trade. It’s the ability to be better suited to the production of one good than to the production of another good. Second, the Production Possibility Curve is a curve measuring the maximum combination of outputs that can be obtained from a given number of inputs.
Third, the Principle of Increasing Marginal Opportunity Cost states that in order to get more of something, one must give up ever-increasing quantities of something else. And, fourth, limitations such as regulatory trade restrictions, tariffs, and quotas limit and sometimes prevent goods from being traded between countries. Application of Learning’s to Workplace The main concept I can use in the workplace involves the comparative advantage in countries without inherent advantages. What I am talking about is the means of learning by doing.
Every application or skill I have was learned by doing. As each day passes, I am approached with new problems with the existing technology and must find solutions. Sometimes this places me in a position where I have to learn new software quickly in order to present it to management as a viable alternative. Conclusion In conclusion, the International Trade Simulation was a learning experience that taught the advantages and disadvantages of trade between countries and the concept of comparative advantage.
It is still amazing that countries refrain from developing Free Trade Agreements when most economists agree that it would result in a tremendous boon to all economies involved. But it was most interesting to not that comparative advantage can be applied to more than international trade; it can be applied to every individual’s life and common situations. References: Colander, D. C. (2004). Macroeconomics. [5th ed. ]. Irwin/McGraw Hill: Burr Ridge, IL. Applying International Trade Concepts: (2003). Apollo Group, Inc.