In jumping into international trade a country would ideally want to maximize profits and maximize the impact of opportunity costs associated with importing and exporting goods and services. The ideal situation for a country involved in international trade would be the exportation of specialized goods that can be efficiently produced and the importation of goods that are produced elsewhere that are produced under similar conditions. Doing so creates reasonably priced goods that are desirable to other countries. The contents of the paper will discuss the advantages and limitations of international trade as identified in the simulation and will indentify four key points from the reading assignments that were emphasized in the simulation. In addition there will be a discussion on the application of what was learned in the simulation to a familiar organization. Lastly there will be a summary of results from this assessment.
Rodamia International Trade Advantages and LimitationsOne major advantage of international trade, as pointed out in the simulation, is that by importing certain goods that a country does not have an advantage over means that the country will be able to optimize the production of the products that they do have advantage over. In this type of situation a country exports an efficiently made, high quality product. For example in the first scenario Rodamia the best products for export were cheese and DVD players. Due certain choices along with availability of technology and resources those commodities were the best choices to produce and subsequently export.
Importing corn from Uthania was another good choice because corn is produced at a lower opportunity cost which passes that savings along to Rodamia. In addition importing corn allows Rodamia to put a large amount of its resources into producing cheese. Suntize has a comparative advantage in electronics so importing watches from them was a good decision as well. In trading with Suntize and Uthania this made Rodamia in line with opportunity costs of production in each country. The limitation is that comparative advantage does not stay the same because over time as technology develops and skill level adapts the advantage changes as well.
Scenario 2 & 3Another advantage is that in order to stabilize international conditions countries can decide to or not to impose tariffs to equalize the market. In the second scenario Suntize exported watches to Rodamia at a lower price than the watches Suntize was selling domestically. Placing a different price otherwise called dumping, causes the international market to become unstable. Rodamia decided to place a tariff so that the price imported can equate to the market value of the watches. The dumping margin was calculated at 25% which would raise a tariff of $40 per unit or 25% of the export price. The tariff also proves to help protect the domestic producers. This is so because the number of imports starts to decrease and domestic production numbers raise because of it.
In Rodamia the tariffs caused imports from Suntize to drop to 2.00 million units and increased domestic production to 6.00 million units. One of the limitations is that imposing tariffs means that consumers will no longer be able to reap the benefits of a cheaper imported product. High tariffs can mean that consumers may have to pay for higher priced domestically made goods. In scenario three not imposing a tariff proved to be an advantage because not imposing a tariff on Uthania and Suntize caused them not to impose tariffs on the cheese that is imported from Rodamia. A tariff would also harm goods producers in Uthania and Suntize. The limitations are that in Rodamia the corn industry is in its beginnings and imposing a tariff would protect the domestic industry from cheaper produced corn. A tariff would foster the potential for Rodamia to be a large corn producer.
Scenario 4Free trade improves domestic market competition. What this means for the consumer is better quality goods and for producers an expanded market in which to export their goods. Countries involved in free trade benefit from all the other countries involved as once a country determines their competitive advantage other countries can reap the benefits of having quality goods. Rodamia has decided to negotiate free trade agreements with both Uthania and Suntize. In doing so free trade negotiation lowers trade barriers which allow countries to explore other markets. This can provide consumers with a larger variety of products. In addition opening the country to other markets increase production leads to an increase competition and consumers benefit from this. The limitations are that free trade negotiations do not affect countries that are not a part of the FTA. Countries outside of the FTA will have high trade barriers.
Four Key PointsFour key points that were emphasized in the readings and in the simulation were comparative advantage, consumer surplus, opportunity costs, and trade restrictions. Comparative advantage is when a country possesses the technology and resources to produce at good at a lower cost compared to another good and another countries production. Since Rodamia could produce cheese efficiently their comparative advantage would lay in cheese production. The comparative advantages in the simulation determined Rodamia’s exports and imports from the neighboring countries. Consumer surplus is when a country can produce goods at a lower price than another country. The country of Suntize may have had a consumer surplus with its production of electronics. The decision to choose Suntize to import watches was based upon the fact that Suntize had an advantage in producing electronic goods. Opportunity cost is the benefit foregone by producing a certain good (Colander, 2004).
Opportunity costs were weighed heavily in Rodamia choosing goods to export. Rodamia was encouraged to export the commodity that had the lowest opportunity cost which turned out to be cheese. Giving away 2000 tons of corn cut cheese production in half where as if no corn was exported and imported instead, yields 8 million pounds of cheese. The last key point involves trade restrictions. Some types of trade restrictions include tariffs, quotas, embargos, and licenses. Tariffs were imposed upon Suntize for creating an unbalanced market. The tariff helped to equalize the imported price with the market value. Not imposing trade restrictions can also help not to harm foreign producers of goods and in return they may not decide to place tariffs on imports.
Application of SimulationAs a frequent traveler to foreign Asian countries I now know why some countries produce the goods they produce. For example Jasmine rice is widely known as a Thai commodity but their number one export is computers and computer parts. This is so because Thailand has a comparative advantage in producing those goods and exporting them. Because of the lowered price of production Thailand will be able to export units at a reasonable price making those products desirable to countries that are in need of them. In addition I also see the major disadvantages of being a country that does not have any sort of comparative advantage. This would make it difficult to trade with other countries that will look for products that can be produced efficiently and less costly.
Summary of Results
Scenario 1:Exports: Cheese and DVDsImports: Corn/UthaniaWatches/SuntizeScenario 2:Level of Tariff (%/unit): 40Imports from Suntize (million units): 2.00Domestic Product (million units): 6.00Scenario 3:Tariff level: 0%Imports from Uthania & Alfazia ($ in million): 37.29Exports from Uthania ($ in million): 32.48Exports to Alfazia ($ in millions): 8.86Rodamia’s Balance of Trade ($ in millions): 4.04Scenario 4Weather to Negotiate FTA’s: YesCountry to Negotiate FTA’s with: Alfazia and Uthania
In summary international trade does not come without issues of creating optimal exports and importing the most cost efficient goods. International trade seems to expand the variety of goods that consumers want and for a country and its producer it seeks out new consumers and markets. The contents of this paper has discussed the advantages and limitations of international trade as identified in the simulation and indentified four key points from the reading assignments that were emphasized in the simulation. In addition there was a discussion on the application of what was learned in the simulation to a familiar organization. Lastly there was a summary of results from this assessment.
Colander, D.C. (2004). Economics (5th ed.). Burr Ridge, IL: Irwin/McGraw-HillUniversity of Phoenix. (2007). Applying International Trade Concepts. Retrieved on October18, 2007 from, University of Phoenix, rEesource, Simulation,ECO360- Economics for Business I Web site.