Trade Theory Paper

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Trade Theory Paper

Course: BSM 407 - Business Economics

Lecturer: Mr. Daniel L. Hammes

Student: Ngo Thanh Hien

ID: 30115093

Date: March 4th, 2018

Trade is a long-standing and very important activity in everyday life. Trade not only helps the economy grow, it also helps solve the problem of scarcity. Large countries in terms of size and human resources are able to produce and provide products to their people, so why do big countries such as the US and China still need exports and imports and why nations need trade? We all know that each country has different natural resources and climate, different customs and habits, people have different shapes and talents. Moreover, the way that each country uses to produce goods is different, so they do not have the same effects. Deciding to produce or offer any service has an opportunity cost, that means that if we invest in manufacturing this product we will not have the opportunity to produce another product anymore. When a nation can create more of a great with the same assets that another nation can, it is said to have an outright advantage in the generation of that great. On the off chance that the moment nation has an outright advantage in creating a great that the to begin with nation needs, both will be superior off in case they specialize and trade. But the exchange is more often get an advantage to both nations indeed in the event that one has an outright advantage in the generation of both products that are to be exchanged. Given any two items, a country has a comparative advantage in the item with the lower opportunity fetched. The terms of exchange must be such that both nations lower the opportunity costs of the merchandise they are getting from the exchange.

Specialization alludes to the propensity of nations to specialize in certain items which they exchange for other products or maybe than creating all utilization merchandise on their possess. Nations create an excess of the item in which they specialize and exchange it for a distinctive excess great of another nation. Each country has its own specialization and trade. These two factors are based on “opportunity” costs (comparative advantage) and not an absolute advantage” (Tucker, 2009). Absolute advantage is the capacity of a nation, person, company or locale to create a great or benefit at a lower taken a toll per unit than the taken a toll at which any other substance produces that same great or benefit. Substances with outright focal points can deliver an item or benefit utilizing a little number of inputs or by utilizing a more productive handle than other substances creating the same item or service. For example, the United States can produce 700 million gallons of wine per year, while Italy can produces 4 billion gallons of wine per year. Thus, Italy has an absolute advantage since it produces numerous more gallons of wine in the same sum of time as the US. There is no nation, in any case, has the outright advantage in creating all products. Italy may have the absolute advantage of producing alcohol but the United States has an absolute advantage in productivity with regard to both shoes and refrigerators. Just because a country has an absolute advantage in an industry doesn't mean that it will be its comparative advantage. That depends on what the trading opportunity costs are. Comparative advantage is when a nation produces a good or service for a lower opportunity cost than other. A country with a comparative advantage makes the trade off worth it. The advantages of buying their good or service outweigh the disadvantages. The country may not necessarily the best at producing something. But the good or service has a low opportunity cost for other countries to import. For example, for Italy, the opportunity cost of producing 10 gallons of wine is 30 hours of labor, so 1 gallons of wine costs 3 hours of labor. For the US, the opportunity cost of producing 20 gallons of wine is 100 hours of labor, so 1 gallons of wine costs 5 hours of labor. This means that Italy has a comparative advantage in wine production as it must give up fewer hours of labor than the US. In terms of rice production, for the US, 50 hours of labor can produce 10 refrigerators; thus, 1 refrigerators cost 5 hours of labor. For Italy, the opportunity cost of producing 10 refrigerators is 80 hours of labor, so 1 refrigerators costs 8 hours of labor. Obviously, Italy has a comparative advantage in wine because of its lower hours of labor. Therefore, us should specialize in refrigerators as it is more efficient in refrigerators production. Italy, on the other hand, is relatively more efficient at producing wine and should specialize in that production.